RH 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA RH INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ​ ​ ​ Report of Independent Registered Public Accounting Firm (PCAOB ID: 238 ) ​ 64 Consolidated Balance Sheets ​ 67 Consolidated Statements of Income ​ 68 Consolidated Statements of Comprehensive Income ​ 69 Consolidated Statements of Stockholders’ Equity ​ 70 Consolidated Statements of Cash Flows ​ 71 Notes to Consolidated Financial Statements ​ 74 ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 63 ​ Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of RH Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of RH and its subsidiaries (the “Company”) as of January 28, 2023 and January 29, 2022, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended January 28, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date as the Company did not design and maintain an effective control activity over the presentation and disclosure of net income per share, specifically the application of authoritative guidance, including new accounting standards, to the net income per share computations. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. Change in Accounting Principle As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity, and the computation of net income per share for such instruments and contracts in fiscal 2022. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. ​ ​ ​ 64 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions . Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Consolidation of Variable Interest Entities As described in Notes 3 and 8 to the consolidated financial statements, when the Company has a variable interest in another legal entity, management evaluates whether that legal entity is within the scope of the variable interest entity (“VIE”) model and, if so, whether the Company is the primary beneficiary of the VIE. Management consolidates a VIE if the Company’s involvement indicates that it is the primary beneficiary. The Company is the primary beneficiary of a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The determination of the power to direct the activities that most significantly impact economic performance requires judgement and is impacted by numerous factors, including the purpose of the VIE, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among the variable interest holders and other agreements with the legal entity and its variable interest holders. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 65 ​ Table of Contents In fiscal 2022, the Company formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs”) for real estate development activities related to Gallery transformation and global expansion strategies. The Member LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support. Upon the formation of each Member LLC, the Company determined that the power to direct the most significant activities of each Member LLC is either controlled by the Company or shared between the members of the Member LLCs. In the instances where there is shared power between the members, the Company determined that the Company is most closely associated with each Member LLC. Accordingly, the Company is the primary beneficiary of the Member LLCs and consolidates the results of operations, financial condition and cash flows of the Member LLCs in the consolidated financial statements. As of January 28, 2023, the carrying amounts of these VIEs’ total assets and liabilities included in the consolidated balance sheet are $201 million and $26 million, respectively. The principal considerations for our determination that performing procedures relating to the consolidation of the Member LLCs as VIEs is a critical audit matter are (i) the significant judgment by management when determining whether the Company is the primary beneficiary of the VIE based on whether the Company has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the purpose of each Member LLC, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among variable interest holders, and other agreements with the legal entity and its variable interest holders. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of management’s controls over the assessment of each Member LLC for consolidation, including controls over the judgments used to reach consolidation conclusions regarding these entities. These procedures also included, among others (i) reading the operating agreements; (ii) evaluating management’s determination of whether each Member LLC constitutes a variable interest entity; and (iii) evaluating management’s determination of which member has the power to direct the most significant activities and the obligation to absorb losses or the right to receive benefits that could potentially be significant to each Member LLC based on numerous factors, including the purpose of the VIE, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among the variable interest holders and other agreements with the legal entity and its variable interest holders . ​ ​ /s/ PricewaterhouseCoopers LLP San Francisco, California March 29, 2023 We have served as the Company’s auditor since 2008. ​ ​ ​ ​ ​ ​ 66 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents RH CONSOLIDATED BALANCE SHEETS ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ (in thousands) ASSETS ​ ​ Cash and cash equivalents ​ $ 1,508,101 ​ $ 2,177,889 Restricted cash ​ ​ 3,662 ​ ​ — Accounts receivable—net ​ 59,763 ​ 57,914 Merchandise inventories ​ 801,841 ​ 734,289 Prepaid expense and other current assets ​ 139,297 ​ 121,350 Total current assets ​ 2,512,664 ​ 3,091,442 Property and equipment—net ​ 1,635,984 ​ 1,227,920 Operating lease right-of-use assets ​ ​ 527,246 ​ ​ 551,045 Goodwill ​ 141,048 ​ 141,100 Tradenames, trademarks and other intangible assets ​ 74,633 ​ 73,161 Deferred tax assets ​ 167,039 ​ 56,843 Equity method investments ​ ​ 101,468 ​ ​ 100,810 Other non-current assets ​ 149,207 ​ 298,149 Total assets ​ $ 5,309,289 ​ $ 5,540,470 LIABILITIES AND STOCKHOLDERS’ EQUITY ​ ​ Accounts payable and accrued expenses ​ $ 374,949 ​ $ 442,379 Deferred revenue and customer deposits ​ ​ 325,754 ​ 387,933 Convertible senior notes due 2023—net ​ ​ 1,696 ​ ​ 9,389 Convertible senior notes due 2024—net ​ ​ — ​ ​ 3,600 Operating lease liabilities ​ ​ 80,384 ​ ​ 73,834 Other current liabilities ​ 103,190 ​ 146,623 Total current liabilities ​ 885,973 ​ 1,063,758 Asset based credit facility ​ — ​ — Term loan B—net ​ 1,936,529 ​ 1,953,203 Term loan B-2—net ​ 469,245 ​ — Real estate loans ​ ​ 17,909 ​ ​ — Convertible senior notes due 2023—net ​ — ​ 59,002 Convertible senior notes due 2024—net ​ ​ 41,724 ​ ​ 184,461 Non-current operating lease liabilities ​ 505,809 ​ 540,513 Non-current finance lease liabilities ​ ​ 653,050 ​ ​ 560,550 Deferred tax liabilities ​ ​ 6,315 ​ ​ — Other non-current obligations ​ 8,074 ​ 8,706 Total liabilities ​ 4,524,628 ​ 4,370,193 Commitments and contingencies (Note 20) ​ ​ ​ ​ Stockholders’ equity: ​ ​ Preferred stock—$ 0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of January 28, 2023 and January 29, 2022 ​ — ​ ​ — Common stock— $ 0.0001 par value per share, 180,000,000 shares authorized, 22,045,385 shares issued and outstanding as of January 28, 2023; 21,506,967 shares issued and outstanding as of January 29, 2022 ​ 2 ​ 2 Additional paid-in capital ​ 247,076 ​ 620,577 Accumulated other comprehensive loss ​ ( 2,403 ) ​ ( 1,410 ) Retained earnings ​ 539,986 ​ 551,108 Total stockholders’ equity ​ ​ 784,661 ​ ​ 1,170,277 Total liabilities and stockholders’ equity ​ $ 5,309,289 ​ $ 5,540,470 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 67 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Net revenues ​ $ 3,590,477 ​ $ 3,758,820 ​ $ 2,848,626 Cost of goods sold ​ 1,778,492 ​ 1,903,409 ​ 1,523,095 Gross profit ​ 1,811,985 ​ 1,855,411 ​ 1,325,531 Selling, general and administrative expenses ​ 1,089,828 ​ 928,230 ​ 858,673 Income from operations ​ 722,157 ​ 927,181 ​ 466,858 Other expenses ​ ​ ​ Interest expense—net ​ 113,210 ​ 64,947 ​ 69,250 (Gain) loss on extinguishment of debt ​ 169,578 ​ 29,138 ​ ( 152 ) Tradename impairment ​ ​ — ​ ​ — ​ ​ 20,459 Other expense—net ​ ​ 30 ​ ​ 2,778 ​ ​ — Total other expenses ​ 282,818 ​ 96,863 ​ 89,557 Income before income taxes and equity method investments ​ 439,339 ​ 830,318 ​ 377,301 Income tax expense (benefit) ​ ( 91,358 ) ​ 133,558 ​ 104,598 Income before equity method investments ​ ​ 530,697 ​ ​ 696,760 ​ ​ 272,703 Share of equity method investments losses ​ ​ 2,055 ​ ​ 8,214 ​ ​ 888 Net income ​ $ 528,642 ​ $ 688,546 ​ $ 271,815 Weighted-average shares used in computing basic net income per share ​ 23,523,065 ​ 21,270,448 ​ 19,668,976 Basic net income per share ​ $ 22.47 ​ $ 32.37 ​ $ 13.82 Weighted-average shares used in computing diluted net income per share ​ 26,561,988 ​ 31,113,395 ​ 27,302,268 Diluted net income per share ​ $ 19.90 ​ $ 22.13 ​ $ 9.96 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ 68 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents RH CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2023 2022 2021 ​ ​ (in thousands) Net income ​ $ 528,642 ​ $ 688,546 ​ $ 271,815 Net gains (losses) from foreign currency translation ​ ( 993 ) ​ ( 3,975 ) ​ 5,325 Comprehensive income ​ $ 527,649 ​ $ 684,571 ​ $ 277,140 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 69 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ COMMON STOCK ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ TREASURY STOCK ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ACCUMULATED RETAINED ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ADDITIONAL OTHER EARNINGS ​ ​ ​ ​ ​ ​ TOTAL ​ ​ ​ PAID-IN COMPREHENSIVE (ACCUMULATED ​ STOCKHOLDERS' ​ SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT) SHARES AMOUNT EQUITY ​ ​ (in thousands, except share amounts) Balances—February 1, 2020 ​ 19,236,681 $ 2 $ 430,662 $ ( 2,760 ) $ ( 409,253 ) — $ — $ 18,651 Stock-based compensation ​ — ​ — ​ 145,278 ​ — ​ — — ​ — ​ 145,278 Issuance of restricted stock ​ 3,192 ​ — ​ — ​ — ​ — — ​ — ​ — Vested and delivered restricted stock units ​ 76,602 ​ — ​ ( 8,348 ) ​ — ​ — — ​ — ​ ( 8,348 ) Exercise of stock options ​ 292,949 ​ — ​ 14,377 ​ — ​ — — ​ — ​ 14,377 Repurchases of common stock ​ ( 600 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ 600 ​ ​ ( 72 ) ​ ​ ( 72 ) Retirement of treasury stock ​ — ​ ​ — ​ ​ ( 77 ) ​ ​ — ​ ​ — ​ ( 617 ) ​ ​ 77 ​ ​ — Shares issued in connection with warrant agreements ​ 1,386,580 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ — Settlement of convertible senior notes ​ 1,131,645 ​ — ​ ( 315,708 ) ​ — ​ — ( 1,131,645 ) ​ 315,708 ​ — Exercise of call option under bond hedge upon settlement of convertible senior notes ​ ( 1,131,662 ) ​ — ​ 315,713 ​ — ​ — 1,131,662 ​ ( 315,713 ) ​ — Net income ​ — ​ — ​ — ​ — ​ 271,815 — ​ — ​ 271,815 Net gains from foreign currency translation ​ — ​ — ​ — ​ 5,325 ​ — — ​ — ​ 5,325 Balances—January 30, 2021 ​ 20,995,387 ​ $ 2 ​ $ 581,897 ​ $ 2,565 ​ $ ( 137,438 ) ​ — ​ $ — ​ $ 447,026 Stock-based compensation ​ — ​ ​ — ​ ​ 48,478 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 48,478 Issuance of restricted stock ​ 1,260 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ — Vested and delivered restricted stock units ​ 43,320 ​ ​ — ​ ​ ( 20,671 ) ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ ( 20,671 ) Exercise of stock options ​ 466,967 ​ ​ — ​ ​ 32,045 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 32,045 Settlement of convertible senior notes ​ 1,377,512 ​ ​ — ​ ​ ( 901,379 ) ​ ​ — ​ ​ — ​ ( 1,377,479 ) ​ ​ 880,207 ​ ​ ( 21,172 ) Exercise of call option under bond hedge upon settlement of convertible senior notes ​ ( 1,377,479 ) ​ ​ — ​ ​ 880,207 ​ ​ — ​ ​ — ​ 1,377,479 ​ ​ ( 880,207 ) ​ ​ — Net income ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 688,546 ​ — ​ ​ — ​ ​ 688,546 Net losses from foreign currency translation ​ — ​ ​ — ​ ​ — ​ ​ ( 3,975 ) ​ ​ — ​ — ​ ​ — ​ ​ ( 3,975 ) Balances—January 29, 2022 ​ 21,506,967 $ 2 $ 620,577 $ ( 1,410 ) $ 551,108 — $ — $ 1,170,277 Stock-based compensation ​ — ​ ​ — ​ ​ 43,546 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 43,546 Issuance of restricted stock ​ 3,577 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ — Vested and delivered restricted stock units ​ 5,284 ​ ​ — ​ ​ ( 803 ) ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ ( 803 ) Exercise of stock options ​ 4,249,081 ​ ​ — ​ ​ 231,297 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 231,297 Repurchase of common stock—including excise tax ​ ( 3,719,550 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ 3,719,550 ​ ​ ( 1,003,700 ) ​ ​ ( 1,003,700 ) Retirement of treasury stock ​ — ​ ​ — ​ ​ ( 444,047 ) ​ ​ — ​ ​ ( 559,653 ) ​ ( 3,719,550 ) ​ ​ 1,003,700 ​ ​ — Exercise of call option under bond hedge upon settlement of convertible senior notes ​ ( 36,968 ) ​ ​ — ​ ​ 14,705 ​ ​ — ​ ​ — ​ ( 36,968 ) ​ ​ ( 14,705 ) ​ ​ — Settlement of convertible senior notes ​ 36,994 ​ ​ — ​ ​ ( 14,705 ) ​ ​ — ​ ​ — ​ 36,968 ​ ​ 14,705 ​ ​ — Termination of common stock warrants ​ — ​ — ​ ( 386,708 ) ​ — ​ — — ​ — ​ ( 386,708 ) Termination of convertible note hedge ​ — ​ — ​ 236,050 ​ — ​ — — ​ — ​ 236,050 Impact of ASU 2020-06 adoption ​ — ​ — ​ ( 56,390 ) ​ — ​ 19,889 — ​ — ​ ( 36,501 ) Non-cash equity compensation related to consolidated variable interest entities ​ — ​ ​ — ​ ​ 3,554 ​ ​ — ​ ​ — ​ — ​ ​ — ​ ​ 3,554 Net income ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 528,642 ​ — ​ ​ — ​ ​ 528,642 Net losses from foreign currency translation ​ — ​ ​ — ​ ​ — ​ ​ ( 993 ) ​ ​ — ​ — ​ ​ — ​ ​ ( 993 ) Balances—January 28, 2023 ​ 22,045,385 $ 2 $ 247,076 $ ( 2,403 ) $ 539,986 — $ — $ 784,661 ​ The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 70 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF CASH FLOWS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2023 2022 2021 ​ ​ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 528,642 ​ $ 688,546 ​ $ 271,815 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 108,588 ​ ​ 96,022 ​ ​ 100,040 Non-cash operating lease cost ​ ​ 75,185 ​ ​ 72,479 ​ ​ 64,132 Tradename impairment ​ ​ — ​ ​ — ​ ​ 20,459 Asset impairments ​ ​ 24,186 ​ ​ 9,630 ​ ​ 6,484 Loss on sale leaseback transaction ​ ​ — ​ ​ — ​ ​ 9,352 Amortization of debt discount ​ — ​ ​ 28,816 ​ ​ 42,372 Stock-based compensation expense ​ 43,546 ​ ​ 48,478 ​ ​ 145,704 Non-cash compensation related to consolidated variable interest entities ​ ​ 4,470 ​ ​ — ​ ​ — Non-cash finance lease interest expense ​ ​ 32,051 ​ ​ 26,412 ​ ​ 24,011 Product recalls ​ ​ 560 ​ ​ 1,940 ​ ​ 7,370 Deferred income taxes ​ ​ ( 91,988 ) ​ ​ ( 6,921 ) ​ ​ ( 4,920 ) (Gain) loss on extinguishment of debt ​ ​ 169,578 ​ ​ 29,138 ​ ​ ( 152 ) Share of equity method investments losses ​ ​ 2,055 ​ ​ 8,214 ​ ​ 888 Other non-cash items ​ 5,249 ​ ​ ( 6,649 ) ​ ​ 3,998 Cash paid attributable to accretion of debt discount upon settlement of debt ​ ​ — ​ ​ ( 55,243 ) ​ ​ ( 84,003 ) Change in assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ( 1,846 ) ​ ​ 1,564 ​ ​ ( 10,485 ) Merchandise inventories ​ ( 77,193 ) ​ ​ ( 190,074 ) ​ ​ ( 104,621 ) Prepaid expense and other assets ​ ( 102,521 ) ​ ​ ( 49,555 ) ​ ​ ( 67,349 ) Landlord assets under construction—net of tenant allowances ​ ( 51,369 ) ​ ​ ( 68,454 ) ​ ​ ( 69,508 ) Accounts payable and accrued expenses ​ ( 56,264 ) ​ ​ 43,435 ​ ​ 63,583 Deferred revenue and customer deposits ​ ( 62,086 ) ​ ​ 107,306 ​ ​ 116,205 Other current liabilities ​ ( 37,653 ) ​ ​ ( 9,778 ) ​ ​ 43,856 Current and non-current operating lease liabilities ​ ( 76,968 ) ​ ​ ( 77,252 ) ​ ​ ( 58,920 ) Other non-current obligations ​ ( 32,499 ) ​ ​ ( 35,940 ) ​ ​ ( 19,541 ) Net cash provided by operating activities ​ 403,687 ​ 662,114 ​ 500,770 ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 71 ​ Table of Contents RH CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2023 2022 2021 ​ ​ (in thousands) CASH FLOWS FROM INVESTING ACTIVITIES ​ ​ ​ ​ ​ ​ ​ Capital expenditures ​ ( 173,642 ) ​ ​ ( 185,383 ) ​ ​ ( 111,126 ) Proceeds from sale of asset ​ 5,287 ​ ​ — ​ ​ 25,006 Equity method investments ​ ( 2,713 ) ​ ​ ( 8,970 ) ​ ​ ( 80,723 ) Acquisition of business and assets ​ — ​ ​ — ​ ​ ( 17,900 ) Deposits on asset under construction ​ ​ — ​ ​ — ​ ​ ( 12,857 ) Net cash used in investing activities ​ ( 171,068 ) ​ ( 194,353 ) ​ ( 197,600 ) CASH FLOWS FROM FINANCING ACTIVITIES ​ ​ ​ Borrowings under asset based credit facility ​ ​ — ​ ​ — ​ ​ 359,401 Repayments under asset based credit facility ​ ​ — ​ ​ — ​ ​ ( 359,401 ) Borrowings under term loans ​ ​ 500,000 ​ ​ 2,000,000 ​ ​ — Repayments under term loans ​ ​ ( 21,250 ) ​ ​ ( 5,000 ) ​ ​ — Borrowings under real estate loans ​ ​ 16,000 ​ ​ — ​ ​ — Repayments under real estate loans ​ ​ ( 10 ) ​ ​ — ​ ​ — Borrowings under promissory and equipment security notes ​ ​ — ​ ​ — ​ ​ 12,857 Repayments under promissory and equipment security notes ​ ( 13,863 ) ​ ​ ( 22,949 ) ​ ​ ( 34,456 ) Repayments of convertible senior notes ​ ​ ( 13,064 ) ​ ​ ( 335,729 ) ​ ​ ( 215,846 ) Repayment under convertible senior notes repurchase obligation ​ ​ ( 395,372 ) ​ ​ — ​ ​ — Debt extinguishment costs ​ ​ ( 8,059 ) ​ ​ — ​ ​ — Debt issuance costs ​ ( 28,069 ) ​ ​ ( 26,411 ) ​ ​ — Principal payments under finance lease agreements—net of tenant allowances ​ ​ ( 10,146 ) ​ ​ ( 14,158 ) ​ ​ ( 12,498 ) Proceeds from termination of convertible senior note hedges ​ ​ 231,796 ​ ​ — ​ ​ — Payments for termination of common stock warrants ​ ​ ( 390,934 ) ​ ​ — ​ ​ — Repurchases of common stock ​ ​ ( 1,000,000 ) ​ ​ — ​ ​ — Proceeds from exercise of stock options ​ 231,297 ​ ​ 32,045 ​ ​ 14,377 Tax withholdings related to issuance of stock-based awards ​ ​ ( 803 ) ​ ​ ( 20,671 ) ​ ​ ( 8,348 ) Net cash provided by (used in) financing activities ​ ( 902,477 ) ​ 1,607,127 ​ ( 243,914 ) Effects of foreign currency exchange rate translation ​ ( 243 ) ​ ​ ( 95 ) ​ ​ 157 Net increase (decrease) in cash and cash equivalents, restricted cash and restricted cash equivalents ​ ( 670,101 ) ​ 2,074,793 ​ 59,413 ​ ​ ​ 72 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents RH CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2023 2022 2021 ​ ​ (in thousands) Cash and cash equivalents, restricted cash and restricted cash equivalents ​ ​ ​ ​ Beginning of period—cash and cash equivalents ​ 2,177,889 ​ 100,446 ​ ​ 47,658 Beginning of period—restricted cash equivalents (acquisition related escrow deposits) ​ 3,975 ​ ​ 6,625 ​ ​ — Beginning of period—cash and cash equivalents and restricted cash equivalents ​ $ 2,181,864 ​ $ 107,071 ​ $ 47,658 End of period—cash and cash equivalents ​ 1,508,101 ​ 2,177,889 ​ ​ 100,446 End of period—restricted cash ​ 3,662 ​ — ​ ​ — End of period—restricted cash equivalents (acquisition related escrow deposits) ​ — ​ 3,975 ​ ​ 6,625 End of period—cash and cash equivalents, restricted cash and restricted cash equivalents ​ $ 1,511,763 ​ $ 2,181,864 ​ $ 107,071 Cash paid for interest ​ $ 133,821 ​ $ 39,466 ​ $ 27,249 Cash paid for taxes ​ ​ 41,355 ​ ​ 158,910 ​ ​ 74,219 Non-cash transactions: ​ ​ ​ ​ ​ ​ Property and equipment additions in accounts payable and accrued expenses at period-end ​ $ 17,755 ​ $ 14,651 ​ $ 28,377 Property and equipment additions acquired under real estate loans ​ ​ 2,000 ​ ​ — ​ ​ — Landlord asset additions in accounts payable and accrued expenses at period-end ​ ​ 1,229 ​ ​ 13,180 ​ ​ 19,943 Reclassification of assets from landlord assets under construction to finance lease right-of-use assets ​ ​ 220,236 ​ ​ 61,900 ​ ​ 68,459 Extinguishment of convertible senior notes related to repurchase obligation ​ ​ ( 261,988 ) ​ ​ — ​ ​ — Financing liability and embedded derivative arising from convertible senior notes repurchase ​ ​ 405,577 ​ ​ — ​ ​ — Shares issued on settlement of convertible senior notes ​ ​ ( 14,705 ) ​ ​ ( 901,379 ) ​ ​ ( 315,708 ) Shares received on exercise of call option under bond hedge upon settlement of convertible senior notes ​ ​ 14,705 ​ ​ 880,207 ​ ​ 315,713 Conversion of loan receivables into equity of consolidated variable interest entities ​ ​ 27,096 ​ ​ — ​ ​ — Promissory notes forgiven in exchange for assets ​ ​ — ​ ​ — ​ ​ 65,857 Conversion of loan receivables into equity method investments ​ ​ — ​ ​ — ​ ​ 20,219 The accompanying notes are an integral part of these Consolidated Financial Statements. ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 73 ​ Table of Contents RH NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1—NATURE OF BUSINESS RH, a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” or the “Company”), is a leading retailer and luxury lifestyle brand operating primarily in the home furnishings market. Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Source Books. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and baby, child and teen furnishings. As of January 28, 2023, we operated a total of 67 RH Galleries and 37 RH outlet stores in 31 states, the District of Columbia and Canada, as well as 14 Waterworks Showrooms throughout the United States and in the U.K., and had sourcing operations in Shanghai and Hong Kong. In September 2022, we opened our first RH Guesthouse in New York. ​ NOTE 2—ORGANIZATION Our company was formed on August 18, 2011 and capitalized on September 2, 2011 as a holding company for the purpose of facilitating an initial public offering of common equity and was at such time a direct subsidiary of Home Holdings, LLC, a Delaware limited liability company (“Home Holdings”). On November 1, 2012, we acquired all of the outstanding shares of capital stock of Restoration Hardware, Inc., a Delaware corporation, and Restoration Hardware, Inc. became our direct, wholly owned subsidiary. Restoration Hardware, Inc. was a direct, wholly owned subsidiary of Home Holdings prior to our initial public offering. On November 7, 2012, we completed our initial public offering. On December 15, 2016, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to change our name to “RH,” effective January 1, 2017. Macroeconomic Factors There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and rising interest and mortgage rates, which impacted consumer spending on the home and the home-related categories. These factors may have a number of adverse effects on macroeconomic conditions and markets in which we operate, with the potential for an economic recession and a sustained downturn in the housing market. Factors such as a slowdown in the housing market or negative trends in stock market prices could have a negative impact on demand for our products. We believe that these macroeconomic factors have contributed to the slowdown in demand that we have experienced in our business over the last several fiscal quarters. Our decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to macroeconomic factors. NOTE 3—SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include our accounts and those of our wholly owned subsidiaries, as well as the financial information of variable interest entities (“VIEs”) where we represent the primary beneficiary and have the power to direct the activities that most significantly impact the entity’s performance (refer to Note 8— Variable Interest Entities ). Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process. ​ ​ ​ 74 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Fiscal Years Our fiscal year ends on the Saturday closest to January 31. As a result, our fiscal year may include 53 weeks. Our fiscal years ended January 28, 2023 (“fiscal 2022”), January 29, 2022 (“fiscal 2021”) and January 30, 2021 (“fiscal 2020”) each consisted of 52 weeks. Our next 53-week fiscal year is the fiscal year ending February 3, 2024 (“fiscal 2023”). Use of Accounting Estimates The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements. Cash and Cash Equivalents We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Concentration of Credit Risk We maintain our cash and cash equivalent accounts in high-quality financial institutions. The amount of cash and cash equivalents held with certain financial institutions exceeds government-insured limits. We perform ongoing evaluations of these institutions to limit our concentration of credit risk. Restricted Cash Our restricted cash deposits represent an escrow balance for one real estate development limited liability company that is a consolidated variable interest entity. Refer to Note 8— Variable Interest Entities . Accounts Receivable Accounts receivable consist primarily of receivables from our credit card processors for sales transactions, receivables related to our Contract business and other miscellaneous receivables. Accounts receivable is presented net of allowance for expected credit losses of $ 3.4 million and $ 3.6 million as of January 28, 2023 and January 29, 2022, respectively. Merchandise Inventories Our merchandise inventories consist primarily of finished goods and are carried at the lower of cost or net realizable value, with cost determined on a weighted-average cost method. To determine if the value of inventory should be marked down below original cost, we use estimates to determine the lower of cost or net realizable value, which considers current and anticipated demand and the merchandise age. The inventory value is adjusted periodically to reflect current market conditions, which requires judgments that may significantly affect the ending inventory valuation, as well as gross margin. The estimates used in inventory valuation are lower of cost or net realizable value reserves and obsolescence (including excess and slow-moving inventory). In addition, we estimate and accrue for inventory shrinkage. Our inventory reserves contain uncertainties that require us to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. We adjust inventory reserves for net realizable value and obsolescence based on trends, aging reports, specific identification and estimates of future retail sales prices. Reserves for shrinkage are estimated and recorded throughout the year as a percentage of shipped sales for the direct channels, and as a percentage of cost of goods sold for the outlet business, based on historical shrinkage results and current inventory levels. Actual shrinkage is recorded throughout the year based upon periodic physical inventory counts. Actual inventory shrinkage and obsolescence can vary from estimates due to factors, including the volume of inventory movement and execution against loss prevention initiatives in our distribution centers, home delivery center locations, off-site storage locations and with our third-party transportation providers. Our inventory reserve balances were $ 40 million and $ 24 million as of January 28, 2023 and January 29, 2022, respectively. Product Recalls When necessary, we initiate product recalls for certain of our products, as well as adjust accruals related to certain product recalls previously initiated due to changes in estimates based on customer response and vendor and insurance recoveries. The product recall accrual was $ 6.9 million and $ 5.5 million as of January 28, 2023 and January 29, 2022, respectively, and is included in other current liabilities on the consolidated balance sheets. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 75 ​ Table of Contents Advertising Expenses Advertising expenses primarily represent the costs associated with our catalog mailings, which we refer to as Source Books, as well as print and website marketing. Total advertising expense, which is recorded in selling, general and administrative expenses on the consolidated statements of income, was $ 71 million, $ 40 million and $ 59 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. Our advertising expenses may vary due to the timing and volume of our Source Book circulation. Capitalized Catalog Costs Capitalized catalog costs consist primarily of third-party incremental direct costs to prepare, print and distribute our Source Books. Such costs are capitalized and recognized as expense upon the delivery of the Source Books to the carrier. In the case of multiple printings of a Source Book, the creative costs will be expensed in full upon the initial delivery of Source Books to the carrier. We had $ 27 million and $ 22 million of capitalized catalog costs as of January 28, 2023 and January 29, 2022, respectively, which are included in prepaid expense and other current assets on the consolidated balance sheets. Website and Print Advertising Website and print advertising expenses, which include e-commerce advertising, web creative content and direct marketing activities such as print media, radio and other media advertising, are expensed as incurred or upon the release of the content or the initial advertisement. Property and Equipment Property and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method, generally using the following useful lives: ​ ​ ​ CATEGORY OF PROPERTY AND EQUIPMENT ​ USEFUL LIFE Building and building improvements 40 years Machinery, equipment and aircraft 3 to 10 years Furniture, fixtures and equipment 3 to 7 years Computer software 3 to 10 years The cost of leasehold improvements is amortized over the lesser of the useful life of the asset or the reasonably certain lease term. We expense all internal-use software and website development costs incurred in the preliminary project stage and capitalize certain direct costs associated with the development and purchase of internal-use software or website development costs, including external costs of materials and services and internal payroll costs related to the software project, as “computer software” within property and equipment. Interest is capitalized on construction in progress and software projects during the period in which expenditures have been made and activities are in progress to prepare the asset for its intended use. We capitalized interest of $ 4.9 million, $ 12 million and $ 5.6 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. During fiscal 2021 and fiscal 2020, $ 10 million and $ 5.3 million, respectively, of the $ 12 million and $ 5.6 million capitalized interest relates to the capitalization of non-cash interest associated with the amortization of the convertible senior notes debt discount. No amortization of the debt discounts were recognized during fiscal 2022, as we recombined the previously outstanding equity component of the 2023 Notes and 2024 Notes upon the adoption of Accounting Standards Update (“ASU”) 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) in the first quarter of fiscal 2022. Land purchases are recorded at cost and are non-depreciable assets. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Refer to “Impairment—Long-Lived Assets.” ​ ​ ​ 76 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Lease Accounting We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space. The initial lease terms of our real estate leases generally range from ten to fifteen years , and certain leases contain renewal options for up to an additional 25 years , the exercise of which is at our sole discretion. We also lease certain equipment with lease terms generally ranging from two to seven years . Our lease agreements generally do not contain any material residual value guarantees or material restrictions or covenants. We account for lease and non-lease components as a single lease component for real estate leases, and for all other asset classes we account for the components separately. We determine the lease classification and begin to recognize lease and any related financing expenses upon lease commencement, which for real estate leases is generally upon store opening or, to a lesser extent, when we take possession or control of the asset. We sublease certain real estate locations to third parties under operating leases and recognize rental income received on a straight-line basis over the lease term, which is recorded as an offset to selling, general and administrative expenses on the consolidated statements of income. Lease arrangements may require the landlord to provide tenant allowances directly to us. Standard tenant allowances received from landlords, typically those received under operating lease agreements, are recorded as cash and cash equivalents with an offset recorded in lease right-of-use assets on the consolidated balance sheets. Tenant allowances that are reasonably certain to be received subsequent to lease commencement are reflected as a reduction of both the lease liabilities and right-of-use assets on the consolidated balance sheets at the commencement date. In the case of leases with associated construction, tenant allowances are provided for us to design and build the leased asset. Tenant allowances received from landlords during the construction phase of a leased asset and prior to lease commencement are recorded as cash and cash equivalents with an offset recorded in other non-current assets (to the extent we have incurred related capital expenditure for construction costs) or in other current liabilities (to the extent that payments are received prior to capital construction expenditures by us) on the consolidated balance sheets. After the leased asset is constructed and the lease commences, we reclassify the tenant allowance from other non-current assets or other current liabilities to lease right-of-use assets on the consolidated balance sheets, and such allowances are amortized over the reasonably certain lease term. Lease Classification Certain of our real estate and equipment leases are classified as finance leases. Lease characteristics that we evaluate to determine lease classification include, but are not limited to, the reasonably certain lease term, incremental borrowing rate and fair value of the leased asset. Additionally, the economic life of the leased asset impacts the lease classification, particularly related to historical buildings that tend to have longer lives. Lease related assets under such classification are included in “finance lease right-of-use assets” within property and equipment—net on the consolidated balance sheets. Leases that do not meet the definition of a finance lease are considered operating leases. Lease related assets classified as operating leases are included in operating lease right-of-use assets on the consolidated balance sheets. Reasonably Certain Lease Term In recognizing the lease right-of-use assets and lease liabilities, we utilize the lease term for which we are reasonably certain to use the underlying asset, including consideration of options to extend or terminate the lease. At lease commencement, we evaluate whether it is reasonably certain to exercise available options based on consideration of a variety of economic factors and the circumstances related to the leased asset. Factors considered include, but are not limited to, (i) the contractual terms compared to estimated market rates, (ii) the uniqueness or importance of the asset or its location, (iii) the potential costs of obtaining an alternative asset, (iv) the potential costs of relocating or ceasing use of the asset, including the consideration of leasehold improvements and other invested capital, and (v) any potential tax consequences. The determination of the reasonably certain lease term affects the inclusion of rental payments utilized in the incremental borrowing rate calculations, the results of the lease classification test, and consideration of certain assets held for sale or planned for sale-leaseback. The reasonably certain lease term may materially impact our financial position related to certain Design Galleries or distribution center facilities which typically have greater lease payments. Although the above factors are considered in our analysis, the assessment involves subjectivity considering our strategy, expected future events and market conditions. While we believe our estimates and judgments in determining the lease term are reasonable, future events may occur which may require us to reassess this determination. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 77 ​ Table of Contents Leases, or lease extensions, with a term of twelve months or less are not recorded on the consolidated balance sheets, and we recognize lease expense as incurred over the lease term. Lease Payments The majority of our real estate lease agreements include minimum rent payments which are subject to stated lease escalations over the lease term and eligible renewal periods. These stated fixed payments, through the reasonably certain lease term, are included in our measurement of the lease right-of-use assets and lease liabilities upon lease commencement. Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels. Additionally, certain lease agreements include rental payments based solely on a percentage of retail sales. Due to the variable and unpredictable nature of such payments, we do not recognize a lease right-of-use asset and lease liability related to such payments. Estimated variable rental payments are included in accounts payable and accrued expenses on the consolidated balance sheets in the period they are incurred and until such payments are made, and the related lease cost is included in cost of goods sold on the consolidated statements of income. We have a small group of real estate leases that include rental payments periodically adjusted for inflation (e.g., based on the consumer price index). We include these variable payments in the initial measurement of the lease right-of-use asset and lease liability according to the index or rate at the commencement date and incorporate adjustments to rental payments in future periods if such increases have a minimum rent escalation (e.g., floor). Changes due to differences between the variable lease payments estimated at lease commencement and actual amounts incurred are recognized in the consolidated statements of income in the period such costs are incurred. Lease concessions granted in fiscal 2020 related to the effects of the COVID-19 pandemic that did not result in a substantial increase in the rights of the lessor or our obligations as the lessee were accounted for as if no change to the lease contract were made. Under this approach, we recognized a separate non-interest bearing payable for any deferred payments in the concession period, which was recorded in accounts payable and accrued expenses on the consolidated balance sheets, and there was no change to the recognized lease expense on the consolidated statements of income. We accounted for COVID-19 related rent abatements as variable lease payments on the consolidated statements of income. Remaining lease concessions for operating and finance lease agreements included in accounts payable and accrued expenses on the consolidated balance sheets as of January 28, 2023 and January 29, 2022 were immaterial. Incremental Borrowing Rate As our real estate leases and most of our equipment leases do not include an implicit interest rate, we determine the discount rate for each lease based upon the incremental borrowing rate (“IBR”) in order to calculate the present value of lease payments at the commencement date. The IBR is computed as the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the total lease payments in a similar economic environment. We utilize our outstanding debt facilities, including our asset based credit facility or our Term Loan Credit Agreement issued in October 2021 and amended in May 2022, as the basis for determining the applicable IBR for each lease. We estimate the incremental borrowing rate for each lease primarily by reference to yield rates on debt issuances by companies of a similar credit rating, the weighted-average lease term and adjustments for differences between the yield rates and the actual term of the credit facility. In determining the yield rates, for newly constructed Design Galleries or significant distribution centers we utilize market information on the lease commencement date and, for all other leases, we utilize market information as of the beginning of the quarter in which the lease commenced. Fair Value We determine the fair value of the underlying asset, considering lease components such as land and building, for purposes of determining the lease classification and allocating our contractual rental payments to the lease components. The fair value of the underlying asset and lease components also impact the evaluation and accounting for assets held for sale and sale-leaseback transactions. The fair value assessments may materially impact our financial position related to certain Design Galleries or distribution center facilities. The determination of fair value requires subjectivity and estimates, including the use of multiple valuation techniques and uncertain inputs, such as market price per square foot and assumed capitalization rates or the replacement cost of the assets, where applicable. Where real estate valuation expertise is required, we obtain independent third-party appraisals to determine the fair value of the underlying asset and lease components. While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable. ​ ​ ​ 78 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Construction Related Activities We are often involved in the construction of leased stores for our new Design Galleries. Upon construction commencement, we evaluate whether or not we, as lessee, control the asset being constructed and, depending on the extent to which we are involved, we may be the “deemed owner” of the leased asset for accounting purposes during the construction period under a build-to-suit arrangement. If we are the “deemed owner” for accounting purposes during the construction period, upon construction commencement we are required to capitalize (i) costs incurred by us and (ii) the cash and non-cash assets contributed by the landlord for construction as property and equipment on our consolidated balance sheets as “build-to-suit property”, with an offsetting financing obligation under build-to-suit lease transactions. The contributions by the landlord toward construction, including the building, existing site improvements at construction commencement and any amounts paid by the landlord for construction, are included as property and equipment additions due to build-to-suit lease transactions within the non-cash section of the consolidated statements of cash flows. Over the lease term, these non-cash additions to property and equipment do not impact our cash outflows, nor do they impact net income on the consolidated statements of income. Upon completion of the construction project where we are the deemed owner, we perform a sale-leaseback analysis to determine if we can derecognize the build-to-suit asset and corresponding financing obligation. If the asset and liability cannot be derecognized, we account for the agreement as a debt-like financing arrangement. If we are not the “deemed owner” for accounting purposes during the construction period, such lease is classified as either an operating or finance lease upon lease commencement. During the construction period and prior to lease commencement, any capital amounts contributed by us toward the construction of the leased asset (excluding normal leasehold improvements, which are recorded within property and equipment—net) are recorded as “Landlord assets under construction” within other non-current assets on the consolidated balance sheets. Upon completion of the construction project, and upon lease commencement, we reclassify amounts of the construction project determined to be the landlord asset to lease right-of-use assets on the consolidated balance sheets based on the lease classification determined at lease commencement. Sale-Leaseback Activities We occasionally enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell the property to a third-party and agree to lease the property back for a certain period of time. To determine whether the transfer of the property should be accounted for as a sale, we evaluate whether we have transferred control to the third-party in accordance with the guidance set forth in Topic 606. If the transfer of the asset is a sale at market terms, we recognize the transaction price for the sale based on the cash proceeds received, derecognize the carrying amount of the underlying asset and recognize a gain or loss in the consolidated statements of income for any difference between the carrying value of the asset and the transaction price. We then account for the leaseback in accordance with our lease accounting policy. If the transfer of the asset is determined not to be a sale, we account for the transaction as a debt-like financing arrangement. We continue to present the asset within property and equipment—net on the consolidated balance sheets and recognize a non-current obligation on the consolidated balance sheets for the transaction price, with the financial liability measured in accordance with other applicable GAAP. Intangible Assets Intangible assets reflect the value assigned to tradenames, trademarks, domain names and other intangible assets. The cost of purchasing transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses is capitalized as an intangible asset. We do not amortize our intangible assets as we define the life of these assets as indefinite. Impairment Goodwill Goodwill is initially recorded as of the acquisition date, is measured as any excess of the purchase price over the estimated fair value of the identifiable net assets acquired and is assigned to the applicable reporting unit. A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed. As of January 28, 2023 and January 29, 2022, goodwill relates to the RH Segment only. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 79 ​ Table of Contents Goodwill is not amortized, but rather is subject to impairment testing annually to determine whether it is impaired or whenever events occur or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset; general economic conditions, such as increasing Treasury rates or unexpected changes in gross domestic product growth; a change in our market share; budget-to-actual performance and consistency of operating margins and capital expenditures; a product recall or an adverse action or assessment by a regulator; or changes in management or key personnel. We perform our annual goodwill impairment testing in the fourth fiscal quarter. We first perform a qualitative assessment to evaluate goodwill for potential impairment by evaluating events and circumstances relevant to the reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on that assessment, it is more likely than not that the fair value of the reporting unit is below its carrying value, a quantitative impairment test is necessary to determine the fair value of the reporting unit. We will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill of the reporting unit. RH Segment Reporting Unit During fiscal 2022, fiscal 2021 and fiscal 2020, we reviewed the RH Segment reporting unit goodwill for impairment by assessing qualitative factors to determine whether it was more likely than not that the fair value of the reporting unit was less than its carrying amount. Based on the qualitative tests performed in each fiscal year, we determined that it was not more likely than not that the fair value of the reporting unit was less than its carrying amount for fiscal 2022, fiscal 2021 and fiscal 2020, and therefore we did not recognize goodwill impairment with respect to the RH Segment in any such fiscal year. Tradenames, Trademarks and Other Intangible Assets We annually evaluate whether tradenames, trademarks and other intangible assets continue to have an indefinite life. Intangible assets are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. We qualitatively assess indefinite-lived intangible assets to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If tradenames, trademarks and other intangible assets are not qualitatively assessed or if such intangible assets are qualitatively assessed and it is determined it is more likely than not that the asset’s fair value is less than its carrying amount, an impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology, which requires judgments that may significantly affect the ending asset valuation. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, our plans for future operations, brand initiatives, recent results of operations and projected future cash flows. In the event we quantitatively assess a reporting unit’s indefinite-lived intangible asset for impairment, we perform an impairment test which utilizes the discounted cash flow methodology under the relief-from-royalty method. Under the relief-from-royalty method, significant assumptions include the forecasted future revenues and the estimated royalty rate, expressed as a percentage of revenues. RH Segment Reporting Unit During the fourth quarters of fiscal 2022, fiscal 2021 and fiscal 2020, we qualitatively assessed the indefinite-lived intangible assets of the RH Segment reporting unit for impairment and determined it was not more likely than not that the fair value of the assets were less than their carrying amounts. Based on the qualitative tests performed in each fiscal year, we did not perform quantitative impairment tests in any year. We did not recognize any impairment with respect to intangible assets for the RH Segment reporting unit in fiscal 2022, fiscal 2021 and fiscal 2020. Waterworks Reporting Unit During fiscal 2020, as a result of the COVID-19 health crisis and related temporary showroom closures, we updated the long-term financial projections for the Waterworks reporting unit which resulted in a significant decrease in forecasted revenues and profitability. We recognized a $ 20 million non-cash impairment charge for the Waterworks tradename in the first quarter of fiscal 2020. The impairment charge was recorded in tradename impairment on the consolidated statements of income. ​ ​ ​ 80 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents During the fourth quarters of fiscal 2022, fiscal 2021 and fiscal 2020, we performed a qualitative impairment test on the Waterworks tradename and determined it was not more likely than not that the fair value of the asset was less than its carrying amount. Accordingly, we did not recognize any further impairment with respect to the Waterworks reporting unit tradename in any period. The carrying value of the Waterworks indefinite-lived tradename asset as of both January 28, 2023 and January 29, 2022 was $ 17 million. Long-Lived Assets Long-lived assets, such as property and equipment and lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, change in intended use of an asset, a product recall or an adverse action or assessment by a regulator. If the sum of the estimated undiscounted future cash flows over the remaining life of the primary asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis of the asset or asset group. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for the stores is the individual Gallery level. Since there is typically no active market for our long-lived assets, we estimate fair values based on the expected future cash flows of the asset or asset group, using a discount rate commensurate with the related risk. The estimate of fair value requires judgments that may significantly affect the ending asset valuation. Future cash flows are estimated based on Gallery-level historical results, current trends, and operating and cash flow projections. Our estimates are subject to uncertainty and may be affected by a number of factors outside of our control, including general economic conditions and the competitive environment. While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates. We also review our capital expenditures for Galleries under construction and recognize impairment charges when there is a change in the intended use of an asset, including asset disposals. We recognized long-lived asset impairment charges related to such construction expenditures of $ 13 million, $ 9.6 million and $ 3.1 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. During the first quarter of fiscal 2020, as a result of the COVID-19 health crisis and related temporary retail location closures, we performed an impairment review of long-lived assets at the individual retail location level. As a result of such analysis, we recognized long-lived asset impairment charges of $ 3.5 million related to one RH Baby & Child Gallery and one Waterworks showroom, comprising lease right-of-use asset impairment of $ 2.0 million and property and equipment impairment of $ 1.5 million. Except as noted above, we did not record impairment for long-lived tangible assets at the individual retail location level in fiscal 2022, fiscal 2021 and fiscal 2020. From time to time, we record impairment for certain corporate assets and other long-lived assets, including our home delivery location centers, resulting from an update to both the timing and the amount of future estimated lease related cash inflows based on present market conditions. Such impairment charges are included in s elling, general and administrative expenses on the consolidated statements of income. Variable Interest Entities (VIE) Our consolidated financial statements include the results of operations and the financial position of subsidiaries in which we have a controlling financial interest as if the consolidated group were a single economic entity. When we have a variable interest in another legal entity, we evaluate whether that legal entity is within the scope of the VIE model and, if so, whether we are the primary beneficiary of the VIE. We evaluate a legal entity for consolidation under the VIE model if no scope exceptions apply and, by design, the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack any of the characteristics of a controlling financial interest. We consolidate a VIE if our involvement indicates that we are the primary beneficiary. We are the primary beneficiary of a VIE if we have both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 81 ​ Table of Contents The determination of the power to direct the activities that most significantly impact economic performance requires judgement and is impacted by numerous factors, including the purpose of the VIE, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among the variable interest holders and other agreements with the legal entity and its variable interest holders. We account for investments in VIEs that are limited liability companies where we are not the primary beneficiary using the equity method of accounting. We evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary of our consolidated VIEs, or whether we have become the primary beneficiary of the VIEs we do not consolidate. Consolidated Variable Interest Entities and Noncontrolling Interests We consolidate the results of operations, financial condition and cash flows of real estate development limited liability companies (a “Member LLC”) in our consolidated financial statements when we are the primary beneficiary of the VIE. We account for each acquisition of our controlling interest in a Member LLC as an asset acquisition since substantially all of the fair value of the net assets of each VIE is concentrated in its real estate assets. The operating agreements of each Member LLC specify distributions from operations and upon certain events or liquidation that may be disproportionate to the members’ relative ownership percentages. Distributions are made to the members in proportion to, and in repayment of, various categories of capital contributions and certain preferred returns, after which distributions are made to the members in proportion to their membership interests. To reflect the substance of these arrangements, we measure attributions to noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements for each Member LLC. This is a balance sheet oriented approach that calculates changes in the noncontrolling interest holders’ claim to the net assets of each Member LLC from period to period to determine the income or loss attributable to noncontrolling interests, which are recognized in the consolidated statements of income. In certain instances, we are required to recognize non-cash compensation expense related to equity interests given to the noncontrolling interest holder of consolidated VIEs. There are no explicit or implicit vesting conditions associated with these deemed compensation arrangements. Equity-classified compensation arrangements are measured upon the noncontrolling interest holders being admitted as a member of the VIEs, and liability-classified compensation arrangements are measured at the end of each reporting period. The fair-value-based measure of the equity interests is determined using a Black-Scholes option pricing model that requires the input of subjective assumptions regarding the future cash flows of the VIE, including consideration of future expected debt financing and the expected volatility of the equity interests. We determined these assumptions based on entity specific considerations of (i) the primary expected future cash flows of property rents and expected debt and debt service payments, (ii) discount rates appropriate for the economic environment and anticipated future interest rates and (iii) expected volatility based on historical observed stock prices of publicly traded peer companies, including those involved in real estate development. Equity Method Investments For certain of our investments in VIEs where we are not the managing member and do not have the ability to liquidate the VIE or otherwise remove the managing member, we do not have the power to direct the most significant activities of the VIE and therefore are not the primary beneficiary. We account for such investments using the equity method of accounting. Our investments are presented as equity method investments on the consolidated balance sheets and our proportionate share of earnings or losses of the equity method investments are included in share of equity method investments losses on the consolidated statements of income. We do not elect the fair value option and the equity method investments are initially measured at cost. As of our initial investment date, we determine the fair value of the underlying assets and liabilities held by our equity method investments for purposes of determining whether or not we have basis differences arising in connection with our investment. The determination of fair value of the underlying real estate assets requires subjectivity and estimates, including the use of various valuation techniques and Level 3 inputs, such as market price per square foot and assumed capitalization rates or the replacement cost of the assets, where applicable. If specialized expertise is required we obtain independent third-party appraisals to determine the fair value of the underlying assets and liabilities. While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable. ​ ​ ​ 82 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The operating agreements for each equity method investment specify distributions from operations and upon liquidation that may be disproportionate to the members’ relative ownership percentages. Distributions are made to the members in proportion to, and in repayment of, various categories of capital contributions plus certain preferred returns, after which distributions are made to the members in proportion to their membership interests. To reflect the substance of these arrangements, we measure our proportionate share of the earnings or losses of each equity method investment using the hypothetical liquidation at book value (“HLBV”) method, which is a balance sheet oriented approach to determine our share of earnings or losses that reflects changes in our claims to the net assets of each equity method investment. Due to the presence of basis differences and liquidation preferences, we use the recast financial statements approach in applying the HLBV method whereby we recast the financial statements of each entity to reflect our perspective or basis (thus eliminating the basis differences) when determining our share of the earnings or losses. Our proportionate share of earnings or losses of the equity method investments follow the entities’ distribution priorities, which may change upon the achievement of certain investment return thresholds. Our equity method investment balance is subsequently adjusted for our share of earnings and losses, cash contributions and distributions. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary. Deferred Financing Fees and Debt Issuance Costs Deferred financing fees related to the asset based credit facility are included in other non-current assets on the consolidated balance sheets and are amortized utilizing the straight-line method. Debt issuance costs are recorded as a contra-liability and are presented net against the respective debt balance on the consolidated balance sheets and are amortized utilizing the effective interest method over the expected life of the respective debt. Amortization of deferred financing fees and debt issuance costs are included in interest expense—net on the consolidated statements of income. Revenue Recognition We recognize revenue and the related cost of goods sold when a customer obtains control of the merchandise, which is when the customer has the ability to direct the use of and obtain the benefits from the merchandise. Revenue recognized for merchandise delivered via the home delivery channel is recognized upon delivery. Revenue recognized for merchandise delivered via all other delivery channels are recognized upon shipment. Revenue from “cash-and-carry” store sales are recognized at the point of sale in the store. Discounts or other accommodations provided to customers are accounted for as a reduction of net revenues on the consolidated statements of income. We recognize shipping and handling fees as activities to fulfill the promise to transfer the merchandise to customers. We apply this policy consistently across all of our distribution channels. In instances where revenue is recognized for the related merchandise upon delivery to customers, the related costs of shipping and handling activities are accrued for in the same period. In instances where revenue is recognized for the related merchandise prior to delivery to customers (i.e., revenue recognized upon shipment), the related costs of shipping and handling activities are accrued for in the same period. Costs of shipping and handling are included in cost of goods sold on the consolidated statements of income. Sales tax collected is not recognized as revenue but is included in accounts payable and accrued expenses on the consolidated balance sheets as it is ultimately remitted to governmental authorities. Our customers may return purchased items for a refund. Projected merchandise returns, which are often resalable merchandise, are reserved on a gross basis based on historical return rates. The allowance for sales returns is presented within other current liabilities and the estimated value of the right of return asset for merchandise is presented within prepaid expense and other assets on the consolidated balance sheets. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 83 ​ Table of Contents A summary of the allowance for sales returns is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Balance at beginning of fiscal year ​ $ 25,256 ​ $ 25,559 ​ $ 19,206 Provision for sales returns ​ 150,366 ​ 161,876 ​ 133,226 Actual sales returns ​ ( 154,875 ) ​ ( 162,179 ) ​ ( 126,873 ) Balance at end of fiscal year ​ $ 20,747 ​ $ 25,256 ​ $ 25,559 ​ Deferred Revenue and Customer Deposits We defer revenue associated with merchandise delivered via the home delivery channel, which is included as deferred revenue and customer deposits on the consolidated balance sheets while in-transit. Deferred revenue also includes the unrecognized portion of the annual RH Members Program fee. New membership fees are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period, based on historical trends of sales to members. Membership renewal fees are recorded as deferred revenue when collected from customers and are recognized as revenue on a straight-line basis over the membership period, or one year . Customer deposits represent payments made by customers on custom orders. At the time of order placement we collect deposits for all custom orders equivalent to 50 % of the purchase price. Custom order deposits are recognized as revenue when the customer obtains control of the merchandise. We expect that substantially all of the deferred revenue and customer deposits as of January 28, 2023 will be recognized within the next six months as the performance obligations are satisfied, and membership fees will be recognized over the membership period. Gift Cards We sell gift cards to our customers in our stores and through our websites and Source Books. Such gift cards and merchandise credits do not have expiration dates. We defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards. During fiscal 2022, fiscal 2021 and fiscal 2020, we recognized $ 21 million, $ 20 million and $ 16 million, respectively, of revenue related to previous deferrals related to our gift cards. Customer liabilities related to gift cards was $ 27 million and $ 23 million as of January 28, 2023 and January 29, 2022, respectively. We recognize breakage income associated with gift cards proportional to actual gift card redemptions in net revenues on the consolidated statements of income. We expect that approximately 70 % of the remaining gift card liabilities will be recognized when the gift cards are redeemed by customers. Self-Insurance We maintain insurance coverage for significant exposures as well as those risks that, by law, must be insured. In the case of our health care coverage for employees, we have a managed self-insurance program related to claims filed. Expenses related to this self-insured program are computed on an actuarial basis, based on claims experience, regulatory requirements, an estimate of claims incurred but not yet reported (“IBNR”) and other relevant factors. The projections involved in this process are subject to uncertainty related to the timing and amount of claims filed, levels of IBNR, fluctuations in health care costs and changes to regulatory requirements. We had liabilities of $ 3.6 million and $ 2.9 million related to health care coverage as of January 28, 2023 and January 29, 2022, respectively. We carry workers’ compensation insurance subject to a deductible amount for which we are responsible on each claim. We had liabilities of $ 5.6 million and $ 4.8 million related to workers’ compensation claims, primarily for claims that do not meet the per-incident deductible, as of January 28, 2023 and January 29, 2022, respectively. ​ ​ ​ 84 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Stock-Based Compensation We recognize the fair value of stock-based awards as compensation expense over the requisite service period and include the expense within selling, general and administrative expenses on the consolidated statements of income. For service-only awards, compensation expense is recognized on a straight-line basis, net of forfeitures, over the requisite service period for the fair value of awards that actually vest. Fair value for restricted stock units is valued using the closing price of our stock on the date of grant. The fair value of each option award granted under our award plan is estimated on the date of grant using a Black-Scholes Merton option pricing model (“OPM”) which requires the input of assumptions regarding the expected term, expected volatility, dividend yield and risk-free interest rate. We elected to calculate the expected term of the option awards using the “simplified method.” This election was made based on the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Under the “simplified” calculation method, the expected term is calculated as an average of the vesting period and the contractual life of the options. For awards with performance-based criteria, compensation expense is recognized on an accelerated basis over the requisite service period. The fair value of each performance-based option award granted is estimated on the date of grant using a Monte Carlo simulation option pricing model that requires the input of subjective assumptions regarding the future exercise behavior, expected volatility and a discount for illiquidity. We determined these assumptions based on consideration of (i) future exercise behavior based on the historical observed exercise pattern of the award recipient, (ii) expected volatility based on our historical observed common stock prices measured over the full trading history of our common stock and implied volatility based on 180-day average trading prices of our common stock and (iii) a discount for illiquidity estimated using the Finnerty method. Refer to “ Consolidated Variable Interest Entities and Noncontrolling Interests ” for discussion of compensation expense related to noncontrolling interests. Cost of Goods Sold Cost of goods sold includes, but is not limited to, the direct cost of purchased merchandise, inventory reserves and write-downs, inventory shrinkage, inbound freight, all freight costs to get merchandise to our retail and outlet locations, design and buying costs, occupancy costs related to retail operations and supply chain, such as rent, utilities, depreciation and amortization, property tax and common area maintenance and all logistics costs associated with shipping product to customers. Selling, General and Administrative Expenses Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include payroll and payroll-related expenses, retail related expenses other than occupancy, and the expense related to the operations at our corporate headquarters, including rent, utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes catalog production, mailing and print advertising costs. All retail pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred. Interest Expense—Net Interest expense primarily relates to interest incurred on our term loans and finance lease arrangements. Refer to Note 13— Credit Facilities and Note 11— Leases. Amounts in fiscal 2021 and fiscal 2020 also include amortization of convertible senior notes debt discount, prior to the adoption of ASU 2020-06 in the first quarter of fiscal 2022. Interest income primarily represents interest received related to our cash and cash equivalent balances. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 85 ​ Table of Contents Interest expense—net consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Interest expense ​ $ 151,730 ​ $ 66,883 ​ $ 70,648 Interest income ​ ( 38,520 ) ​ ​ ( 1,936 ) ​ ​ ( 1,398 ) Total interest expense—net $ 113,210 $ 64,947 $ 69,250 ​ Net Income Per Share Basic net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period, including additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued using the if-converted method for convertible senior notes and the treasury stock method for all other instruments. Potential dilutive securities are excluded from the computation of diluted net income per share if their effect is anti-dilutive. The if-converted method is applicable for the convertible senior notes beginning in fiscal 2022 due to the adoption of ASU 2020-06. The treasury stock method was applied in fiscal 2021 and fiscal 2020 prior to the adoption of this accounting standard update discussed in “Recently Issued Accounting Standards.” Treasury Stock We record our purchases of treasury stock at cost as a separate component of stockholders’ equity in the consolidated financial statements. Upon retirement of treasury stock, we allocate the excess of the purchase price over par value to additional paid-in capital subject to certain limitations with any remaining purchase price allocated to retained earnings . The excise tax on share repurchases initiated on and after January 1, 2023 is included in the cost basis of treasury stock. Income Taxes We account for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, we generally take into account all expected future events then known to it, other than changes in the tax law or rates which have not yet been enacted and which are not permitted to be considered. Accordingly, we may record a valuation allowance to reduce our net deferred tax assets to the amount that is more-likely-than-not to be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based upon our best estimate of the recoverability of our net deferred tax assets. Future taxable income and ongoing prudent and feasible tax planning are considered in determining the amount of the valuation allowance, and the amount of the allowance is subject to adjustment in the future. Specifically, in the event we were to determine that it is not more-likely-than-not able to realize our net deferred tax assets in the future, an adjustment to the valuation allowance would decrease income in the period such determination is made. This allowance does not alter our ability to utilize the underlying tax net operating loss and credit carryforwards in the future, the utilization of which is limited to achieving future taxable income. The accounting standard for uncertainty in income taxes prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Differences between tax positions taken in a tax return and amounts recognized in the financial statements generally result in an increase in liability for income taxes payable or a reduction of an income tax refund receivable, or a reduction in a deferred tax asset or an increase in a deferred tax liability, or both. We recognize interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on the consolidated statements of income. ​ ​ ​ 86 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Foreign Currency Matters The functional currency of our foreign subsidiaries is generally the local currency of the country in which the subsidiary operates. Assets and liabilities of the foreign subsidiaries denominated in non-U.S. dollar currencies are translated at the rate of exchange prevailing on the date of the consolidated balance sheets, and revenues and expenses are translated at average rates of exchange for the period. The related translation gains and losses are reflected in the accumulated other comprehensive income (loss) section on the consolidated statements of stockholders’ equity, and net gains (losses) on foreign currency translation , which includes intercompany gains and losses, is presented net of tax on the consolidated statements of comprehensive income. Transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated other comprehensive loss on the consolidated balance sheets. Foreign currency gains and losses resulting from foreign currency transactions denominated in a currency other than the subsidiary’s functional currency are included in other expense—net on the consolidated statements of income. Such foreign exchange gains and losses are due to the net impact of changes in foreign exchange rates as compared to the U.S. dollar from our third-party transactions denominated in foreign currencies, and intercompany loans held in U.S. dollars by our international subsidiaries other than those of a long-term investment nature, where repayment is not planned or anticipated in the foreseeable future. The foreign exchange gains and losses arising on the revaluation of intercompany loans of a long-term investment nature are reported within accumulated other comprehensive loss on the consolidated balance sheets. Recently Issued Accounting Standards New Accounting Standards or Updates Adopted Convertible Instruments and Contracts in an Entity’s Own Equity In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2020-06—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, ASU 2020-06 removes the separation models for convertible debt with a cash conversion feature or convertible instruments with a beneficial conversion feature. As a result, after adopting ASU 2020-06’s guidance, we no longer separately present in equity an embedded conversion feature of such debt. Instead, we account for a convertible debt instrument wholly as debt unless (i) a convertible instrument contains features that require bifurcation as a derivative or (ii) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance that affects our computation of net income per share. ​ We adopted ASU 2020-06 in the first quarter of fiscal 2022 using a modified retrospective transition method. Accordingly, the cumulative effect of the adoption on our opening fiscal 2022 consolidated balance sheets was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ASU 2020-06 ​ ​ ​ ​ JANUARY 29, ​ ADOPTION ​ JANUARY 29, ​ ​ ​ 2022 ​ ADJUSTMENTS ​ 2022 ​ ​ ​ (in thousands) ​ Assets ​ ​ ​ ​ Property and equipment—net ​ $ 1,227,920 ​ $ ( 12,385 ) ​ $ 1,215,535 ​ Deferred tax assets ​ ​ 56,843 ​ ​ 11,909 ​ ​ 68,752 ​ Liabilities ​ ​ ​ ​ Convertible senior notes due 2023—net ​ ​ 59,002 ​ ​ 5,684 ​ ​ 64,686 ​ Convertible senior notes due 2024—net ​ ​ 184,461 ​ ​ 30,341 ​ ​ 214,802 ​ Equity ​ ​ ​ ​ ​ Additional paid-in capital ​ ​ 620,577 ​ ​ ( 56,390 ) ​ ​ 564,187 ​ Retained earnings ​ ​ 551,108 ​ ​ 19,889 ​ ​ 570,997 ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 87 ​ Table of Contents Reference Rate Reform In March 2020, the FASB issued ASU 2020-04 — Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) . In January 2021, the FASB issued ASU 2021-01—Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”) and in December 2022, the FASB issued ASU 2022-06— Reference Rate Reform: Deferral of the Sunset Date of Topic 848 (“ASU 2022-06”), together with ASU 2020-04 and ASU 2021-01, the “ASUs”. The ASUs provide optional expedients and exceptions, if certain criteria are met, for applying GAAP to contracts, hedging relationships, and other transactions affected by the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. The primary contracts for which we currently use LIBOR include our Term Loan B (as defined in Note 13 — Credit Facilities ). The guidance was effective upon issuance and allows entities to adopt the amendments on a prospective basis through the deferred date of December 31, 2024. All new arrangements use alternative reference rates and we are evaluating the impact of adoption on our existing contracts, including with respect to our Term Loan B. We anticipate the Term Loan B will transition to SOFR in fiscal 2023. New Accounting Standards or Updates Not Yet Adopted Disclosure of Supplier Finance Program Obligations In September 2022, the FASB issued ASU 2022-04 — Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”). ASU 2022-04 requires entities to disclose a program’s nature, activity during the period, changes from period to period and potential magnitude. Under ASU 2022-04, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. With the exception of the disclosure of rollforward information, the guidance is effective for fiscal years beginning after December 15, 2022 and is required to be applied retrospectively to all periods for which a balance sheet is presented. The rollforward requirement is effective for fiscal years beginning after December 15, 2023 and is required to be applied prospectively. We are evaluating the impact that ASU 2022-04 will have on our consolidated financial statements and related disclosures, but do not believe the adoption will impact our financial condition, results of operations or cash flows. We will disclose the information required under ASU 2020-04 beginning with the first quarter of fiscal 2023. ​ ​ ​ 88 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 4—PREPAID EXPENSE AND OTHER ASSETS Prepaid expense and other current assets consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ (in thousands) Capitalized catalog costs ​ $ 26,522 ​ $ 22,194 Prepaid expenses ​ ​ 24,352 ​ ​ 31,502 Vendor deposits ​ ​ 21,201 ​ ​ 19,610 Federal and state tax receivable (1) ​ ​ 12,322 ​ ​ — Tenant allowance receivable ​ ​ 8,336 ​ ​ 15,355 Value added tax (VAT) receivable ​ ​ 7,465 ​ ​ 4,529 Right of return asset for merchandise ​ 4,983 ​ 6,429 Interest income receivable ​ ​ 4,878 ​ ​ — Promissory notes receivable, including interest (2) ​ 2,991 ​ 8,401 Other current assets ​ ​ 26,247 ​ ​ 13,330 Total prepaid expense and other current assets ​ $ 139,297 ​ $ 121,350 (1) Refer to Note 15— Income Taxes . (2) Represents promissory notes, including principal and accrued interest, due from an affiliate of the managing member of the Aspen LLCs (refer to Note 8— Variable Interest Entities ). Other non-current assets consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ (in thousands) Initial direct costs prior to lease commencement ​ $ 51,249 ​ $ 57,087 Landlord assets under construction—net of tenant allowances ​ ​ 45,511 ​ ​ 204,013 Capitalized cloud computing costs—net (1) ​ ​ 21,529 ​ ​ 14,910 Vendor deposits—non-current ​ ​ 10,593 ​ ​ 756 Other deposits ​ 7,143 ​ 6,877 Deferred financing fees ​ 3,528 ​ 4,123 Other non-current assets ​ 9,654 ​ 10,383 Total other non-current assets ​ $ 149,207 ​ $ 298,149 ​ ​ (1) Presented net of accumulated amortization of $ 11 million and $ 4.0 million as of January 28, 2023 and January 29, 2022. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 89 ​ Table of Contents NOTE 5—PROPERTY AND EQUIPMENT Property and equipment consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ (in thousands) Finance lease right-of-use assets (1) ​ $ 1,303,133 ​ $ 958,148 Leasehold improvements (2) ​ ​ 391,912 ​ ​ 389,179 Computer software ​ 147,553 ​ 122,552 Land ​ 97,670 ​ 20,614 Building and building improvements (3) ​ 94,508 ​ 54,061 Furniture, fixtures and equipment ​ 86,456 ​ 86,058 Machinery, equipment and aircraft ​ 79,836 ​ 73,968 Built-to-suit property ​ ​ 37,057 ​ ​ 37,057 Total property and equipment ​ ​ 2,238,125 ​ ​ 1,741,637 Less—accumulated depreciation and amortization (4) ​ ( 602,141 ) ​ ( 513,717 ) Total property and equipment—net ​ $ 1,635,984 ​ $ 1,227,920 (1) Refer to “Lease Accounting” within Note 3— Significant Accounting Policies and Note 11— Leases . (2) Includes construction in progress of $ 8.0 million and $ 48 million as of January 28, 2023 and January 29, 2022, respectively. The balance as of January 29, 2022 was disclosed as $ 11 million in our fiscal 2021 Form 10-K and has been updated with the amount presented herein. (3) Includes $ 92 million and $ 51 million of owned buildings under construction related to future Design Galleries as of January 28, 2023 and January 29, 2022, respectively. (4) Includes accumulated amortization related to finance lease right-of-use assets of $ 224 million and $ 174 million as of January 28, 2023 and January 29, 2022, respectively. Refer to Note 11— Leases. We recorded depreciation and amortization of property and equipment, excluding amortization for finance lease right-of-use assets, of $ 56 million, $ 52 million and $ 59 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. NOTE 6—BUSINESS COMBINATIONS On August 28, 2020, we acquired a business for total consideration of $ 15 million funded through available cash, of which $ 1.9 million was deposited into an escrow account for any potential post-closing adjustments. We deposited into escrow an additional $ 5.0 million, which represented a deferred acquisition related payment subject to mutually agreed to conditions and was paid over two years . Acquisition related escrow deposits, included within prepaid expense and other current assets on the consolidated balance sheets, were $ 4.0 million as of January 29, 2022 and were paid in fiscal 2022. On December 7, 2020, we acquired the net assets of a business for $ 4.7 million funded through available cash, of which $ 0.5 million was deposited into an escrow account for any potential post-closing adjustments and was fully paid in fiscal 2020. Additional consideration of $ 4.6 million is expected to be paid over five years , of which $ 2.3 million was paid as of January 28, 2023. During fiscal 2020, we incurred acquisition-related costs associated with these transactions such as financial, legal and accounting advisors, as well as employment related costs, which are included in selling, general and administrative expenses on the consolidated statements of income. No additional acquisition-related costs were incurred in fiscal 2021 or fiscal 2022. Results of operations of the acquired companies have been included in our consolidated statements of income since their respective acquisition dates. Pro forma results of the acquired businesses have not been presented as the results were not considered material to our consolidated financial statements for all periods presented and would not have been material had the acquisitions occurred at the beginning of fiscal 2020. ​ ​ ​ 90 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents We believe that these additions to the RH platform further position us as a leader in the luxury design market as we continue to enhance the RH product assortment. Results of operations of the acquired companies have been included in our consolidated statements of income since their respective acquisition dates. NOTE 7—GOODWILL, TRADENAMES, TRADEMARKS AND OTHER INTANGIBLE ASSETS The following sets forth the goodwill, tradenames, trademarks and other intangible assets activity for the RH Segment and Waterworks: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ RH SEGMENT WATERWORKS ​ ​ ​ ​ TRADENAMES, ​ ​ ​ TRADENAMES, ​ ​ ​ ​ ​ TRADEMARKS AND ​ ​ ​ ​ TRADEMARKS AND ​ ​ ​ ​ ​ OTHER INTANGIBLE ​ ​ ​ ​ OTHER INTANGIBLE ​ ​ GOODWILL ​ ASSETS ​ GOODWILL (1) ​ ASSETS (2) ​ ​ (in thousands) January 30, 2021 $ 141,100 ​ $ 54,663 ​ $ — ​ $ 17,000 Additions ​ ​ — ​ ​ 1,498 ​ ​ — ​ ​ — Foreign current translation ​ — ​ — ​ — ​ — January 29, 2022 ​ 141,100 ​ 56,161 ​ — ​ 17,000 Additions ​ — ​ 1,472 ​ — ​ — Foreign current translation ​ ​ ( 52 ) ​ ​ — ​ ​ — ​ ​ — January 28, 2023 ​ $ 141,048 ​ $ 57,633 ​ $ — ​ $ 17,000 (1) Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. (2) Presented net of an impairment charge of $ 35 million, with $ 20 million recorded in fiscal 2020 . There are no goodwill, tradenames, trademarks and other intangible assets for the Real Estate Segment. NOTE 8—VARIABLE INTEREST ENTITIES Consolidated Variable Interest Entities and Noncontrolling Interests In fiscal 2022, we formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) for real estate development activities related to our Gallery transformation and global expansion strategies. We hold a 50 percent membership interest in seven of the Member LLCs, and the remaining noncontrolling interest of 50 percent in each Member LLC is held by a third-party real estate development partner who is also the managing member of the Aspen LLCs (as defined in “Equity Method Investments” below). In one Member LLC we hold approximately 75 percent membership interest with the remaining noncontrolling interest of approximately 25 percent held by the same Aspen LLCs managing member. The Member LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support. Upon the formation of each Member LLC we determined that the power to direct the most significant activities of each Member LLC is either controlled by us or shared between the members of the Member LLCs. In the instances where there is shared power among related parties as defined in the consolidation accounting guidance, we evaluated the related-party tiebreaker guidance and determined that we are most closely associated with each Member LLC. Accordingly, we are the primary beneficiary of the Member LLCs and we consolidate the results of operations, financial condition and cash flows of the Member LLCs in our consolidated financial statements. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 91 ​ Table of Contents In fiscal 2022, we recognized compensation expense of $ 4.5 million related to the equity interests given to the noncontrolling interest holders of the consolidated VIEs, of which $ 3.6 million is included in additional paid-in capital and $ 0.9 million is included in other non-current obligations on the consolidated balance sheets. The additional paid-in capital portion relates to equity-classified compensation arrangements and represents the fair-value-based measure of the equity interests upon the noncontrolling interest holders being admitted as a member of the VIEs. The other non-current obligations portion relates to liability-classified compensation arrangements and represents the fair-value-based measure of the equity interests at the end of the reporting period. There are no explicit or implicit vesting conditions associated with these compensation arrangements. We measure the noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements of each Member LLC. As of January 28, 2023, the noncontrolling interest holders had no claim to the net assets of each Member LLC based upon such distribution provisions . Accordingly, we did not recognize any noncontrolling interests as of and in fiscal 2022. The carrying amounts and classification of the VIEs’ assets and liabilities included in the consolidated balance sheets were as follows: ​ ​ ​ ​ ​ ​ JANUARY 28, ​ ​ 2023 ​ ​ (in thousands) ASSETS ​ Cash and cash equivalents ​ $ 6,653 Restricted cash (1) ​ ​ 3,662 Prepaid expense and other current assets ​ 3,670 Total current assets ​ 13,985 Property and equipment—net (2) ​ 187,093 Other non-current assets ​ ​ 122 Total assets ​ $ 201,200 LIABILITIES ​ Accounts payable and accrued expenses ​ $ 6,685 Real estate loans (3) ​ ​ 17,909 Other non-current obligations ​ ​ 929 Total liabilities ​ $ 25,523 (1) Restricted cash deposits are held in escrow for one Member LLC and represent a portion of the proceeds from the issuance of the Promissory Note (defined below) that are required to be used for tenant allowances specified in a lease agreement between us and the Member LLC. (2) Includes $ 125 million of construction in progress, which is included in “building and building improvements” within property and equipment —net . (3) Real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets. On August 3, 2022, a Member LLC as the borrower executed a Secured Promissory Note (the “Secured Promissory Note”) with a third-party in an aggregate principal amount equal to $ 2.0 million with a maturity date of August 1, 2032. The Secured Promissory Note bears interest at a fixed rate per annum equal to 6.00 % . On September 9, 2022, a Member LLC as the borrower executed a Promissory Note (the “Promissory Note”) with a third-party bank in an aggregate principal amount equal to $ 16 million with a maturity date of September 9, 2032. The Promissory Note bears interest at a fixed rate per annum equal to 5.37 % until September 15, 2027, on which date the interest rate will reset based on the five-year treasury rate plus 2.00 % , subject to a total interest rate 3.00 % floor. ​ ​ ​ ​ 92 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Equity Method Investments Equity method investments represent our membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) that were formed for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent membership interest in the third Aspen LLC. The Aspen LLCs are VIEs, however, we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Accordingly, we account for these investments using the equity method of accounting. As of January 28, 2023 and January 29, 2022, $ 3.0 million and $ 8.4 million, respectively, of promissory notes receivable, inclusive of accrued interest, are outstanding with the managing member or entities affiliated with the managing member for the Aspen LLCs, which promissory notes are included in prepaid expense and other current assets on the consolidated balance sheets. Promissory notes related specifically to the Aspen LLCs are expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs. We have made in excess of $ 100 million in capital contributions to the Aspen LLCs as contractually required. Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity method investments as of January 28, 2023. During fiscal 2022, fiscal 2021 and fiscal 2020, we recorded our proportionate share of equity method investments losses of $ 2.1 million, $ 8.2 million and $ 0.9 million, respectively, which is included on the consolidated statements of income with a corresponding decrease to the carrying value of equity method investments on the consolidated balance sheets as of January 28, 2023 and January 29, 2022. We did not receive any distributions or have any undistributed earnings of equity method investments in any fiscal year. In February 2023, subsequent to fiscal 2022, we made equity contributions to two of the Aspen LLCs totaling $ 31 million whereby such funding was used to repay a portion of third-party debt secured by certain real estate assets held by the Aspen LLCs. ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 93 ​ Table of Contents NOTE 9—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accounts payable and accrued expenses consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ (in thousands) Accounts payable ​ $ 166,082 ​ $ 242,035 Accrued compensation ​ 76,650 ​ 96,859 Accrued occupancy ​ 28,830 ​ 28,088 Accrued sales taxes ​ 18,900 ​ 24,811 Accrued freight and duty ​ 17,497 ​ 21,888 Accrued interest ​ ​ 14,456 ​ ​ 5,185 Accrued legal reserves ​ ​ 8,921 ​ ​ 1,398 Accrued professional fees ​ 7,447 ​ 5,892 Accrued catalog costs ​ 4,596 ​ 4,127 Other accrued expenses ​ 31,570 ​ 12,096 Total accounts payable and accrued expenses ​ $ 374,949 ​ $ 442,379 ​ Other current liabilities consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ (in thousands) Unredeemed gift card and merchandise credit liability ​ $ 26,733 ​ $ 22,712 Current portion of term loans ​ ​ 25,000 ​ ​ 20,000 Allowance for sales returns ​ ​ 20,747 ​ ​ 25,256 Finance lease liabilities ​ ​ 17,007 ​ ​ 15,511 Foreign tax payable ​ ​ 4,365 ​ ​ — Current portion of equipment promissory notes ​ ​ 1,160 ​ ​ 13,625 Federal and state tax payable ​ ​ — ​ ​ 31,364 Other current liabilities ​ 8,178 ​ 18,155 Total other current liabilities ​ $ 103,190 ​ $ 146,623 ​ ​ NOTE 10—OTHER NON-CURRENT OBLIGATIONS Other non-current obligations consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ (in thousands) Unrecognized tax benefits ​ $ 2,962 ​ $ 3,471 Other non-current obligations ​ 5,112 ​ 5,235 Total other non-current obligations ​ $ 8,074 ​ $ 8,706 ​ ​ ​ ​ ​ 94 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 11—LEASES Lease costs—net consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Operating lease cost (1) ​ $ 100,646 ​ $ 99,985 ​ $ 84,852 Finance lease costs ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortization of leased assets (1) ​ ​ 52,346 ​ ​ 43,964 ​ ​ 41,292 Interest on lease liabilities (2) ​ ​ 32,051 ​ ​ 26,412 ​ ​ 24,011 Variable lease costs (3) ​ ​ 27,848 ​ ​ 36,914 ​ ​ 20,485 Sublease income (4) ​ ​ ( 4,455 ) ​ ​ ( 4,184 ) ​ ​ ( 7,723 ) Total lease costs—net ​ $ 208,436 ​ $ 203,091 ​ $ 162,917 (1) Operating lease costs and amortization of finance lease right-of-use assets are included in cost of goods sold or s elling, general and administrative expenses on the consolidated statements of income based on our accounting policy. Refer to Note 3— Significant Accounting Policies . (2) Included in interest expense—net on the consolidated statements of income. (3) Represents variable lease payments under operating and finance lease agreements, primarily associated with contingent rent based on a percentage of retail sales over contractual levels of $ 19 million, $ 28 million and $ 13 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively, as well as charges associated with common area maintenance of $ 9.3 million, $ 8.8 million and $ 7.1 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. Other variable costs, which include single lease cost related to variable lease payments based on an index or rate that were not included in the measurement of the initial lease liability and right-of-use asset, were not material in any period presented. (4) Included in selling, general and administrative expenses on the consolidated statements of income. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 95 ​ Table of Contents Lease right-of-use assets and lease liabilities consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, ​ JANUARY 29, ​ ​ ​ 2023 2022 ​ ​ ​ ​ (in thousands) ​ ​ Balance Sheet Classification ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ Operating lease right-of-use assets ​ $ 527,246 ​ $ 551,045 Finance leases (1)(2)(3) ​ Property and equipment—net ​ ​ 1,078,979 ​ ​ 784,327 Total lease right-of-use assets ​ ​ ​ $ 1,606,225 ​ $ 1,335,372 Liabilities ​ ​ ​ ​ ​ ​ ​ ​ Current (4) ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ Operating lease liabilities ​ $ 80,384 ​ $ 73,834 Finance leases ​ Other current liabilities ​ ​ 17,007 ​ ​ 15,511 Total lease liabilities—current ​ ​ ​ ​ 97,391 ​ ​ 89,345 Non-current ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ Non-current operating lease liabilities ​ ​ 505,809 ​ ​ 540,513 Finance leases ​ Non-current finance lease liabilities ​ ​ 653,050 ​ ​ 560,550 Total lease liabilities—non-current ​ ​ ​ ​ 1,158,859 ​ ​ 1,101,063 Total lease liabilities ​ ​ ​ $ 1,256,250 ​ $ 1,190,408 (1) Includes capitalized amounts related to our completed construction activities to design and build leased assets, which are reclassified from other non-current assets upon lease commencement. (2) Recorded net of accumulated amortization of $ 224 million and $ 174 million as of January 28, 2023 and January 29, 2022, respectively. (3) Includes $ 39 million and $ 41 million as of January 28, 2023 and January 29, 2022, respectively, related to an RH Design Gallery lease with a landlord that is an affiliate of the managing member of the Aspen LLCs (refer to Note 8— Variable Interest Entities ). (4) Current portion of lease liabilities represents the reduction of the related lease liability over the next 12 months. The maturities of lease liabilities were as follows as of January 28, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ OPERATING ​ FINANCE ​ ​ FISCAL YEAR ​ ​ LEASES LEASES TOTAL ​ ​ ​ ​ (in thousands) 2023 ​ ​ ​ $ 102,197 ​ $ 49,590 ​ $ 151,787 2024 ​ ​ ​ ​ 94,407 ​ ​ 49,950 ​ ​ 144,357 2025 ​ ​ ​ ​ 90,470 ​ ​ 51,365 ​ ​ 141,835 2026 ​ ​ ​ ​ 87,087 ​ ​ 52,132 ​ ​ 139,219 2027 ​ ​ ​ ​ 81,751 ​ ​ 53,273 ​ ​ 135,024 Thereafter ​ ​ ​ ​ 241,717 ​ ​ 963,327 ​ ​ 1,205,044 Total lease payments (1)(2) ​ ​ ​ ​ 697,629 ​ ​ 1,219,637 ​ ​ 1,917,266 Less—imputed interest (3) ​ ​ ​ ​ ( 111,436 ) ​ ​ ( 549,580 ) ​ ​ ( 661,016 ) Present value of lease liabilities ​ ​ ​ $ 586,193 ​ $ 670,057 ​ $ 1,256,250 ​ ​ ​ 96 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents (1) Total lease payments include future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability. Total lease payments exclude $ 663 million of legally binding payments under the non-cancellable term for leases signed but not yet commenced under our accounting policy as of January 28, 2023, of which $ 28 million, $ 38 million, $ 42 million, $ 42 million and $ 40 million will be paid in fiscal 2023, fiscal 2024, fiscal 2025, fiscal 2026 and fiscal 2027, respectively, and $ 473 million will be paid subsequent to fiscal 2027. (2) Excludes an immaterial amount of future commitments under short-term lease agreements as of January 28, 2023. (3) Calculated using the discount rate for each lease at lease commencement. Supplemental information related to leases consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ ​ 2023 2022 Weighted-average remaining lease term (years) ​ ​ ​ ​ ​ ​ Operating leases ​ ​ 8.3 ​ ​ 9.1 Finance leases ​ ​ 21.9 ​ ​ 20.0 Weighted-average discount rate ​ ​ ​ ​ ​ ​ Operating leases ​ ​ 4.08 % ​ ​ 3.94 % Finance leases ​ ​ 5.32 % ​ ​ 4.96 % ​ Other information related to leases consists of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2023 2022 2021 ​ ​ (in thousands) Cash paid for amounts included in the measurement of lease liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash flows from operating leases ​ $ ( 101,513 ) ​ $ ( 102,097 ) ​ $ ( 75,794 ) Operating cash flows from finance leases ​ ​ ( 32,090 ) ​ ​ ( 26,775 ) ​ ​ ( 20,839 ) Financing cash flows from finance leases—net (1) ​ ​ ( 10,146 ) ​ ​ ( 14,158 ) ​ ​ ( 12,498 ) Total cash outflows from leases ​ $ ( 143,749 ) ​ $ ( 143,030 ) ​ $ ( 109,131 ) Lease right-of-use assets obtained in exchange for lease obligations—net of lease terminations (non-cash) ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating leases ​ $ 49,702 ​ $ 172,393 ​ $ 113,828 Finance leases ​ ​ 109,015 ​ ​ 89,617 ​ ​ 57,873 (1) Represents the principal portion of finance lease payments offset by tenant allowances received subsequent to lease commencement of $ 4.7 million in fiscal 2022. No such tenant allowances were received in fiscal 2021 or fiscal 2020. Build-to-Suit Asset During fiscal 2021, we opened the Dallas Design Gallery. During the construction period of this Design Gallery, we were the “deemed owner” for accounting purposes and classified the construction costs as build-to-suit asset within property and equipment—net on our consolidated balance sheets. Upon construction completion and lease commencement, we performed a sale-leaseback analysis and determined that we cannot derecognize the build-to-suit asset. Therefore, the asset remains classified as a build-to-suit asset within property and equipment—net and is depreciated over the term of the useful life of the asset. ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 97 ​ Table of Contents Sale-Leaseback Transaction During fiscal 2020, we executed a sale-leaseback transaction for the Minneapolis Design Gallery for sales proceeds of $ 26 million, which qualified for sale-leaseback accounting in accordance with ASC 842. Concurrently with the sale, we entered into an operating leaseback arrangement with an initial lease term of 20 years and a renewal option for an additional 10 years . We recognized a loss related to the execution of the sale transaction of $ 9.4 million in fiscal 2020, which was recorded in selling, general and administrative expenses on the consolidated statements of income. NOTE 12—CONVERTIBLE SENIOR NOTES In June 2018, we issued in a private offering $ 300 million principal amount of 0.00 % convertible senior notes due 2023 and issued an additional $ 35 million principal amount in connection with the overallotment option granted to the initial purchasers as part of the offering (collectively, the “2023 Notes”). In September 2019, we issued in a private offering $ 350 million principal amount of 0.00 % convertible senior notes due 2024 (the “2024 Notes” and, together with the 2023 Notes, the “Convertible Senior Notes” or the “Notes”). In connection with our adoption of ASU 2020-06 in the first quarter of fiscal 2022, we recombined the previously outstanding equity component, which resulted in an increase in the balance of convertible debt outstanding. Refer to Recently Issued Accounting Standards in Note 3— Significant Accounting Policies for further discussion of the impact of our adoption of ASU 2020-06 in our consolidated financial statements. The outstanding balances under the 2023 Notes and 2024 Notes were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, ​ ​ JANUARY 29, ​ ​ 2023 ​ ​ 2022 ​ ​ ​ ​ UNAMORTIZED ​ ​ ​ ​ ​ ​ ​ UNAMORTIZED ​ ​ ​ ​ ​ ​ DEBT ​ NET ​ ​ ​ ​ DEBT ​ NET ​ ​ PRINCIPAL ​ ISSUANCE ​ CARRYING ​ ​ PRINCIPAL ​ ISSUANCE ​ CARRYING ​ ​ AMOUNT COST (1) AMOUNT ​ AMOUNT COST (1) ​ AMOUNT ​ ​ (in thousands) Convertible senior notes due 2023 (2) ​ $ 1,696 ​ $ — ​ $ 1,696 ​ $ 74,390 ​ $ ( 5,999 ) ​ $ 68,391 ​ Convertible senior notes due 2024 (3) ​ ​ 41,904 ​ ​ ( 180 ) ​ ​ 41,724 ​ ​ 219,638 ​ ​ ( 31,577 ) ​ ​ 188,061 ​ Total convertible senior notes ​ $ 43,600 ​ $ ( 180 ) ​ $ 43,420 ​ $ 294,028 ​ $ ( 37,576 ) ​ $ 256,452 ​ (1) As of January 28, 2023, the balance includes debt issuance costs inclusive of original issuers’ discount. As of January 29, 2022, the balance includes debt issuance costs inclusive of original issuers’ discount, as well as the previously outstanding equity component that was recombined upon the adoption of ASU 2020-06 in the first quarter of fiscal 2022, which was $ 5.7 million for the 2023 Notes and $ 30 million for the 2024 Notes. Refer to Recently Issued Accounting Standards in Note 3— Significant Accounting Policies . (2) As of January 28, 2023, the 2023 Notes outstanding are classified as convertible senior notes due 2023—net within current liabilities . The 2023 Notes outstanding as of January 29, 2022 included a current portion of $ 9.4 million and a non-current portion of $ 59 million. (3) As of January 28, 2023, the 2024 Notes outstanding are classified as convertible senior notes due 2024—net within non-current liabilities . As of January 29, 2022, the 2024 Notes outstanding included a current portion of $ 3.6 million and a non-current portion of $ 184 million. 2023 Notes and 2024 Notes—Bond Hedge and Warrant Terminations and Note Repurchase Bond Hedge and Warrant Terminations During fiscal 2022, we entered into agreements with certain financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants issued in connection with the 2023 Notes and 2024 Notes at an aggregate purchase price of $ 184 million and $ 203 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a volume weighted-average price measurement period of two or three days . Upon entering into these agreements, the warrants were reclassified from stockholders’ equity to current liabilities on the consolidated balance sheets, and accordingly, we recognized a corresponding net loss on the fair value adjustment of the warrants of $ 4.2 million, which is classified within other expense—net on the consolidated statements of income. Upon settlement of these agreements in April 2022, we paid an aggregate of $ 391 million in cash to terminate the warrants. ​ ​ ​ 98 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents During fiscal 2022, we entered into agreements with the Counterparties to terminate all of the convertible note bond hedges issued in connection with the 2023 Notes and 2024 Notes to receive an aggregate closing price of $ 56 million and $ 180 million, respectively, subject to adjustment for a settlement feature based on pricing formulations linked to the trading price of our common stock over a three day volume weighted-average price measurement period. Upon entering into these agreements, the bond hedges were reclassified from stockholders’ equity to current assets on the consolidated balance sheets, and accordingly, we recognized a corresponding loss on the fair value adjustment of the settlement feature of $ 4.3 million, which is classified within other expense—net on the consolidated statements of income. Upon settlement of these agreements in April 2022, we received an aggregate of $ 232 million in cash for the termination of the bond hedges. Notes Repurchase During the first quarter of fiscal 2022, we entered into individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $ 45 million and $ 135 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Notes Repurchase”). The Notes Repurchase provided for an estimated settlement cost of $ 325 million, subject to adjustment to the final settlement cost for an embedded feature based on pricing formulations linked to the trading price of our common stock over a five day volatility weighted-average price measurement period that ended on April 29, 2022. Upon execution of these agreements, we determined that we had modified the debt substantially and applied an extinguishment accounting model. Accordingly, we derecognized the aggregate principal amount of $ 180 million of the Convertible Senior Notes related to the extinguishment of such notes, and subsequently recognized a new financing liability with a fair value of $ 325 million. An embedded derivative related to the conversion feature was bifurcated from the new financing liability and separately recognized with an initial fair value of $ 278 million, with the remaining $ 47 million classified as debt and recognized at its amortized cost basis. Accordingly, we recognized a loss on extinguishment of debt of $ 146 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of $ 1.0 million. Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $ 314 million was paid in cash to the holders, representing the combined carrying value of the debt liability of $ 47 million, as well as the fair value of the bifurcated embedded equity derivative upon settlement of $ 267 million. Accordingly, we recognized a gain on the fair value adjustment of the bifurcated embedded equity derivative of $ 11 million, which is classified within other expense—net on the consolidated statements of income. During the second quarter of fiscal 2022, we entered into additional individual privately negotiated transactions with a limited number of sophisticated investors that were holders of the 2023 Notes and/or the 2024 Notes to repurchase in cash $ 18 million and $ 39 million in aggregate principal amount of the 2023 Notes and 2024 Notes, respectively (the “Additional Notes Repurchase”). The Additional Notes Repurchase provided for an estimated settlement cost of $ 80 million, subject to adjustment to the final settlement cost for an embedded feature based on pricing formulations linked to the trading price of our common stock over a one day volatility weighted-average price measurement period occurring in July 2022. Upon execution of these agreements, we determined that we had modified the debt substantially and applied an extinguishment accounting model. Accordingly, we derecognized the aggregate principal amount of $ 57 million of the Convertible Senior Notes related to the extinguishment of such notes, and subsequently recognized a new financing liability with a fair value of $ 80 million. An embedded derivative related to the conversion feature was bifurcated from the new financing liability and separately recognized with an initial fair value of $ 55 million, with the remaining $ 25 million classified as debt and recognized at its amortized cost basis. Accordingly, we recognized a loss on extinguishment of debt of $ 23 million upon the execution of these agreements, inclusive of acceleration of amortization of debt issuance costs of $ 0.3 million. Upon the remeasurement of the amount owed to the holders in terms of the embedded feature, a total of $ 82 million was paid in cash to the holders, representing the combined carrying value of the debt liability of $ 25 million, as well as the fair value of the bifurcated embedded equity derivative upon settlement of $ 57 million. Accordingly, we recognized a loss on the fair value adjustment of the bifurcated embedded equity derivative of $ 1.5 million, which is classified within other expense—net on the consolidated statements of income. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 99 ​ Table of Contents $ 350 million 0.00 % Convertible Senior Notes due 2024 Prior to June 15, 2024 , the 2024 Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after December 31, 2019, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130 % of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $ 1,000 principal amount of 2024 Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended March 31, 2022. However, this condition was not met for the calendar quarters ended June 30, 2022, September 30, 2022 and December 31, 2022, as a result, the 2024 Notes were not convertible as of December 31, 2022. On and after June 15, 2024 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2024 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2024 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $ 1,000 . During fiscal 2022, holders of $ 3.6 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value. During fiscal 2022, we paid $ 3.6 million in cash and delivered 9,760 shares of common stock to settle the early conversion of these 2024 Notes. We also received 9,760 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes. During fiscal 2021, holders of $ 130 million in aggregate principal amount of the 2024 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2024 Notes converted and shares of our common stock for the remaining conversion value. During fiscal 2021, we paid $ 130 million in cash and delivered 419,182 shares of common stock to settle the early conversion of these 2024 Notes. As a result, we recognized a loss on extinguishment of the liability component of $ 10 million in fiscal 2021. We also received 419,172 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2024 Notes as described below, and therefore, on a net basis issued 10 shares of our common stock in respect to such settlement of the converted 2024 Notes. The remaining liability for the 2024 Notes is classified as a non-current obligation on the consolidated balance sheets since the settlement of the outstanding 2024 Notes will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. $ 335 million 0.00 % Convertible Senior Notes due 2023 Prior to March 15, 2023 , the 2023 Notes are convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2018, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding calendar quarter, the last reported sale price of our common stock on such trading day is greater than or equal to 130 % of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $ 1,000 principal amount of 2023 Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. The first condition was satisfied from the calendar quarter ended September 30, 2020 through the calendar quarter ended December 31, 2022 and, accordingly, holders were eligible to convert their 2023 Notes beginning in the calendar quarter ended December 31, 2020 and are currently eligible to convert their 2023 Notes through March 15, 2023. On and after March 15, 2023 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2023 Notes will be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $ 1,000 . ​ ​ ​ 100 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents During fiscal 2022, holders of $ 9.4 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value. During fiscal 2022, we paid $ 9.4 million in cash and delivered 27,234 shares of common stock to settle the early conversion of these 2023 Notes. We also received 27,208 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes, and therefore, on a net basis issued 26 shares of our common stock in respect to such settlement of the converted 2023 Notes. During fiscal 2021, holders of $ 261 million in aggregate principal amount of the 2023 Notes elected to exercise the early conversion option and we elected to settle such conversions using combination settlement comprised of cash equal to the principal amount of the 2023 Notes converted and shares of our common stock for the remaining conversion value. During fiscal 2021, we paid $ 261 million in cash and delivered 958,330 shares of common stock to settle the early conversion of these 2023 Notes. As a result, we recognized a loss on extinguishment of the liability component of $ 19 million in fiscal 2021. We also received 958,307 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2023 Notes as described below, and therefore, on a net basis issued 23 shares of our common stock in respect to such settlement of the converted 2023 Notes. The remaining liability for the 2023 Notes is classified as a current obligation on the consolidated balance sheets since the settlement of the outstanding 2023 Notes is due on June 15, 2023. The settlement of additional early conversions received, if any, will be made, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. $ 300 million 0.00 % Convertible Senior Notes due 2020 In June 2015 , we issued in a private offering $ 250 million principal amount of 0.00 % convertible senior notes due 2020 and, in July 2015 , we issued an additional $ 50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of our June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes were governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2020 Notes did not bear interest, except that the 2020 Notes were subject to “special interest” in certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2020 Notes. The 2020 Notes were unsecured obligations and did not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events were also considered “events of default” under the 2020 Notes, which could have resulted in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes were guaranteed by our primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. In May 2020, $ 9.4 million in aggregate principal amount of 2020 Notes were converted at the option of the noteholders. We paid $ 9.2 million in cash and delivered 14,927 shares of common stock to settle the converted 2020 Notes. As a result, we recognized a gain on extinguishment of the liability component of $ 0.2 million in fiscal 2020. We also received 14,927 shares of common stock from the exercise of a portion of the convertible bond hedge we purchased concurrently with the issuance of the 2020 Notes as described below, and therefore, on a net basis did not issue any shares of our common stock in respect to such settlement of the 2020 Notes. In July 2020, upon the maturity of the 2020 Notes, the remaining $ 291 million in aggregate principal amount of the 2020 Notes settled for $ 291 million in cash and 1,116,718 shares of common stock. No gain or loss arose on extinguishment of the liability component. We also received 1,116,735 shares of common stock from the exercise of the remainder of the convertible bond hedge we purchased concurrently with the issuance of the 2020 Notes as described below, and therefore, on a net basis received 17 shares of our common stock (which were recorded as treasury stock within the consolidated statements of stockholders’ equity in respect to such settlement of the 2020 Notes. We recorded interest expense of $ 8.9 million for the amortization of the debt discount related to the 2020 Notes and $ 0.6 million related to the amortization of debt issuance costs in fiscal 2020. 2020 Notes—Convertible Bond Hedge and Warrant Transactions In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, we entered into convertible note hedge transactions and warrant transactions. For more information, refer to “2020 Notes—Convertible Bond Hedge and Warrant Transactions” within Note 12— Convertible Senior Notes in our 2021 Form 10-K. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 101 ​ Table of Contents As a result of the operation of the bond hedge in connection with the maturity of the 2020 Notes, we were not required to issue any new shares to settle the notes as these shares were delivered to us under the terms of the bond hedge. The bond hedge was exercised in connection with the maturity date of the 2020 Notes. During fiscal 2020, we delivered 1,386,580 shares upon exercise of the warrants under the terms of the warrant agreements. The warrants expired on January 7, 2021. NOTE 13—CREDIT FACILITIES The outstanding balances under our credit facilities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, ​ JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ ​ ​ ​ ​ UNAMORTIZED ​ ​ ​ ​ ​ UNAMORTIZED ​ ​ ​ ​ ​ ​ ​ ​ ​ DEBT ​ NET ​ ​ ​ ​ DEBT ​ NET ​ ​ INTEREST ​ OUTSTANDING ​ ISSUANCE ​ CARRYING ​ OUTSTANDING ​ ISSUANCE ​ CARRYING ​ ​ RATE (1) AMOUNT COSTS AMOUNT AMOUNT COSTS AMOUNT ​ ​ (dollars in thousands) Asset based credit facility (2) ​ 5.79 % ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — ​ $ — Term loan B (3) ​ 6.88 % ​ ​ 1,975,000 ​ ​ ( 18,471 ) ​ ​ 1,956,529 ​ ​ 1,995,000 ​ ​ ( 21,797 ) ​ ​ 1,973,203 Term loan B-2 (4) ​ 7.67 % ​ ​ 498,750 ​ ​ ( 24,505 ) ​ ​ 474,245 ​ ​ — ​ ​ — ​ ​ — Equipment promissory notes (5) 4.56 % ​ ​ 1,160 ​ ​ — ​ ​ 1,160 ​ 14,785 ​ ( 31 ) ​ 14,754 Total credit facilities ​ ​ ​ $ 2,474,910 ​ $ ( 42,976 ) ​ $ 2,431,934 ​ $ 2,009,785 ​ $ ( 21,828 ) ​ $ 1,987,957 (1) The interest rates for the asset based credit facility, term loans and equipment promissory notes represent the weighted-average interest rates as of January 28, 2023. (2) Deferred financing fees associated with the asset based credit facility as of January 28, 2023 and January 29, 2022 were $ 3.5 million and $ 4.1 million, respectively, and are included in other non-current assets on the consolidated balance sheets. The deferred financing fees are amortized on a straight-line basis over the life of the revolving line of credit, which has a maturity date of July 29, 2026. (3) Represents the outstanding balance of the Term Loan B (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 1,955 million and $ 20 million were included in term loan B—net and other current liabilities , respectively, on the consolidated balance sheets as of January 28, 2023. Outstanding amounts of $ 1,975 million and $ 20 million were included in term loan—net and other current liabilities , respectively, on the consolidated balance sheets as of January 29, 2022. The maturity date of the Term Loan Credit Agreement is October 20, 2028. (4) Represents the outstanding balance of the Term Loan B-2 (defined below) under the Term Loan Credit Agreement, of which outstanding amounts of $ 494 million and $ 5.0 million were included in term loan B-2—net and other current liabilities , respectively, on the consolidated balance sheets as of January 28, 2023. The maturity date of the Term Loan Credit Agreement is October 20, 2028. (5) Represents the net carrying amount of equipment security notes secured by certain of our property and equipment. The remaining $ 1.2 million outstanding balance, included in other current liabilities on the consolidated balance sheets as of January 28, 2023, represents principal payments due in fiscal 2023. Outstanding amounts of $ 14 million were included in other current liabilities on the consolidated balance sheets as of January 29, 2022. Asset Based Credit Facility & Term Loan Facilities On August 3, 2011, Restoration Hardware, Inc. (“RHI”), a wholly-owned subsidiary of RH, along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into the Ninth Amended and Restated Credit Agreement (as amended prior to June 28, 2017, the “Original Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent (the “ABL Agent”). On June 28, 2017, RHI entered into the Eleventh Amended and Restated Credit Agreement (as amended prior to July 29, 2021, the “11 th A&R Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the Original Credit Agreement. ​ ​ ​ 102 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents On July 29, 2021, RHI entered into the Twelfth Amended and Restated Credit Agreement (as amended, the “ABL Credit Agreement”) by and among RHI, Restoration Hardware Canada, Inc., certain other subsidiaries of RH named therein as borrowers or guarantors, the lenders party thereto and the ABL Agent, which amended and restated the 11 th A&R Credit Agreement. The ABL Credit Agreement has a revolving line of credit with initial availability of up to $ 600 million, of which $ 10 million is available to Restoration Hardware Canada, Inc., and includes a $ 300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $ 600 million to up to $ 900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. The ABL Credit Agreement provides that the $ 300 million accordion, or a portion thereof, may be added as a first-in, last-out term loan facility if and to the extent the lenders revise their credit commitments for such facility. The ABL Credit Agreement further provides that the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the ABL Credit Agreement are met. The maturity date of the ABL Credit Agreement is July 29, 2026. The availability of credit at any given time under the ABL Credit Agreement will be constrained by the terms and conditions of the ABL Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the ABL Credit Agreement. All obligations under the ABL Credit Agreement are secured by substantial assets of the loan parties, including inventory, receivables and certain types of intellectual property. Borrowings under the revolving line of credit (other than swing line loans, which are subject to interest at the base rate) bear interest, at the borrower’s option, at either the base rate or LIBOR subject to a 0.00 % LIBOR floor (or, in the case of the Canadian borrowings, the “BA Rate” or the “Canadian Prime Rate”, as such terms are defined in the ABL Credit Agreement, for the Canadian borrowings denominated in Canadian dollars, or the “U.S. Index Rate”, as such term is defined in the ABL Credit Agreement, or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable interest rate margin, in each case. The ABL Credit Agreement was amended in December 2022 to transition from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The ABL Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size. The ABL Credit Agreement does not contain any significant financial ratio covenants or coverage ratio covenants other than a consolidated fixed charge coverage ratio (“FCCR”) covenant based on the ratio of (i) consolidated EBITDA to the amount of (ii) debt service costs plus certain other amounts, including dividends and distributions and prepayments of debt as defined in the ABL Credit Agreement (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the ABL Credit Agreement drops below the greater of (A) $ 40 million and (B) an amount based on 10 % of the total borrowing availability at the time. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis. As of January 28, 2023, RHI was in compliance with the FCCR Covenant. The ABL Credit Agreement requires a daily sweep of all cash receipts and collections to prepay the loans under the agreement while (i) an event of default exists or (ii) when the unused availability under the ABL Credit Agreement drops below the greater of (A) $ 40 million and (B) an amount based on 10 % of the total borrowing availability at the time. The ABL Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for an asset based credit facility. The availability of the revolving line of credit at any given time under the ABL Credit Agreement is limited by the terms and conditions of the ABL Credit Agreement, including the amount of collateral available, a borrowing base formula based upon numerous factors, including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the ABL Credit Agreement. As a result, actual borrowing availability under the revolving line of credit could be less than the stated amount of the revolving line of credit (as reduced by the actual borrowings and outstanding letters of credit under the revolving line of credit). As of January 28, 2023, the amount available for borrowing under the revolving line of credit under the ABL Credit Agreement was $ 533 million, net of $ 27 million in outstanding letters of credit. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 103 ​ Table of Contents Term Loan Credit Agreement On October 20, 2021, RHI entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) by and among RHI as the borrower, the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent (in such capacities, the “Term Agent”) with respect to an initial term loan (the “Term Loan B”) in an aggregate principal amount equal to $ 2,000,000,000 with a maturity date of October 20, 2028. The Term Loan B bears interest at an annual rate based on LIBOR subject to a 0.50 % LIBOR floor plus an interest rate margin of 2.50 % (with a stepdown of the interest rate margin if RHI achieves a specified public corporate family rating). LIBOR is a floating interest rate that resets periodically during the life of the Term Loan B. At the date of borrowing, the interest rate was set at the LIBOR floor of 0.50 % plus 2.50 % and the Term Loan B was issued at a discount of 0.50 % to face value. The Term Loan Credit Agreement contains customary provisions addressing future transition from LIBOR. On May 13, 2022, RHI entered into a 2022 Incremental Amendment (the “2022 Incremental Amendment”) with Bank of America, N.A., as administrative agent, amending the Term Loan Credit Agreement (the Term Loan Credit Agreement as amended by the 2022 Incremental Amendment, the “Amended Term Loan Credit Agreement”). Pursuant to the terms of the 2022 Incremental Amendment, RHI incurred incremental term loans (the “Term Loan B-2”) in an aggregate principal amount equal to $ 500 million with a maturity date of October 20, 2028. The Term Loan B-2 constitutes a separate class from the Term Loan B under the Term Loan Credit Agreement. The Term Loan B-2 bears interest at an annual rate based on the SOFR subject to a 0.50 % SOFR floor plus an interest rate margin of 3.25 % plus a credit spread adjustment of 0.10 %. Other than the terms relating to the Term Loan B-2, the terms of the Amended Term Loan Credit Agreement remain substantially the same as the terms of the existing Term Loan Credit Agreement, including representations and warranties, covenants and events of default. We incurred debt issuance costs of $ 28 million and $ 26 million in fiscal 2022 and fiscal 2021, respectively, in connection with the issuance of the Term Loan Credit Agreement. All obligations under the Term Loan B are guaranteed by certain domestic subsidiaries of RHI. Further, RHI and such subsidiaries have granted a security interest in substantially all of their assets (subject to customary and other exceptions) to secure the Term Loan B. Substantially all of the collateral securing the Term Loan B also secures the loans and other credit extensions under the ABL Credit Agreement. On October 20, 2021, in connection with the Term Loan Credit Agreement, RHI and certain other subsidiaries of RH party to the Term Loan Credit Agreement and the ABL Credit Agreement, as the case may be, entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with the Term Agent and the ABL Agent. The Intercreditor Agreement establishes various customary inter-lender terms, including, without limitation, with respect to priority of liens, permitted actions by each party, application of proceeds, exercise of remedies in case of default, releases of liens and certain limitations on the amendment of the ABL Credit Agreement and the Term Loan Credit Agreement without the consent of the other parties. The borrowings under the Term Loan Credit Agreement may be prepaid in whole or in part at any time, subject to a prepayment premium of 1.0 % in connection with any repricing transaction within the six months following the closing date of the Term Loan Credit Agreement. The Term Loan Credit Agreement contains various restrictive and affirmative covenants, including required financial reporting, limitations on granting certain liens, limitations on making certain loans or investments, limitations on incurring additional debt, restricted payment limitations limiting the payment of dividends and certain other transactions and distributions, limitations on transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of a similar type and size, but provides for unlimited exceptions in the case of incurring indebtedness, granting of liens and making investments, dividend payments, and payments of material junior indebtedness, subject to satisfying specified leverage ratio tests. The Term Loan Credit Agreement does not contain a financial maintenance covenant. The Term Loan Credit Agreement contains customary representations and warranties, events of defaults and other customary terms and conditions for a term loan credit agreement. ​ ​ ​ 104 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents Equipment Loan Facility On September 5, 2017, RHI entered into a Master Loan and Security Agreement with Banc of America Leasing & Capital, LLC (“BAL”) pursuant to which BAL and RHI agreed that BAL would finance certain equipment of ours from time to time, with each such equipment financing to be evidenced by an equipment security note setting forth the terms for each particular equipment loan. Each equipment loan is secured by a purchase money security interest in the financed equipment. The maturity dates of the equipment security notes varied, but generally had a maturity of three or four years and required us to make monthly installment payments. As of January 28, 2023, one equipment security note remains outstanding with a maturity date in April 2023. NOTE 14—FAIR VALUE MEASUREMENTS The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining the fair value, we utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique. Our recurring and non-recurring fair values measurements of financial and non-financial assets and liabilities are classified and disclosed in one of the following categories in accordance with ASC 820— Fair Value Measurements : Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs used in the determination of fair value require significant judgment or estimation. Fair Value Measurements—Recurring Amounts reported as cash and equivalents, restricted cash, receivables, and accounts payable and accrued expenses approximate fair value due to the short-term nature of activity within these accounts. The estimated fair value of the asset based credit facility approximates cost as the interest rate associated with the facility is variable and resets frequently (Level 2). The estimated fair value of the real estate loans approximate their carrying values as they were recently issued. The estimated fair value and carrying value of the 2023 Notes and 2024 Notes and the Term Loan Credit Agreement were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, ​ JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ PRINCIPAL ​ PRINCIPAL ​ ​ FAIR ​ CARRYING ​ FAIR ​ CARRYING ​ ​ VALUE ​ VALUE (1) ​ VALUE ​ VALUE (1) ​ ​ (in thousands) Convertible senior notes due 2023 ​ $ 1,622 ​ $ 1,696 ​ $ 70,857 ​ $ 68,706 Convertible senior notes due 2024 ​ 37,351 ​ ​ 41,904 ​ 198,087 ​ 189,297 Term loan B ​ ​ 1,961,056 ​ ​ 1,975,000 ​ ​ 1,995,000 ​ ​ 1,995,000 Term loan B-2 ​ 500,215 ​ ​ 498,750 ​ — ​ — (1) The carrying value of the convertible senior notes as of January 28, 2023 represents the principal amount of the 2023 Notes and 2024 Notes following our adoption of ASU 2020-06 in the first quarter of fiscal 2022 (refer to Note 3— Significant Accounting Policies ). The carrying value as of January 29, 2022 represents the principal amount less the equity component of the 2023 Notes and 2024 Notes classified in stockholders’ equity , which was required prior to the adoption of ASU 2020-06. The carrying value in both periods excludes the discounts upon original issuance, discounts and commissions payable to the initial purchasers and third-party offering costs, as applicable. The carrying values of the Term Loan B and Term Loan B-2 represent the outstanding amount under each class excluding discounts upon original issuance and third-party offering costs. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 105 ​ Table of Contents The fair value of each of the 2023 Notes and 2024 Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2). The estimated fair values of the Term Loan B and Term Loan B-2 were derived from discounted cash flows using risk-adjusted rates (Level 2). Fair Value Measurements—Non-Recurring The fair value of the non-cash compensation related to noncontrolling interests in the Member LLCs in fiscal 2022, as discussed in “Consolidated Variable Interest Entities and Noncontrolling Interests” within Note 3— Significant Accounting Policies and Note 8— Variable Interest Entities , were determined based on unobservable (Level 3) inputs and valuation techniques. The fair value of the real estate assets associated with our investment in the Aspen LLCs in fiscal 2020, as discussed in “Variable Interest Entities (VIE)” within Note 3— Significant Accounting Policies and Note 8— Variable Interest Entities , were determined based on unobservable (Level 3) inputs and valuation techniques. The fair value of the Waterworks tradename was determined based on unobservable (Level 3) inputs and valuation techniques, as discussed in “Impairment” within Note 3— Significant Accounting Policies . Upon settlement of our convertible senior notes, including the settlements in which holders of the 2023 Notes and 2024 Notes elected to exercise the early conversion option, we recognized a gain or loss on extinguishment of debt in the consolidated statements of income, which represents the difference between the carrying value and fair value of the convertible senior notes immediately prior to the settlement date. The fair value of each of the 2023 Notes and 2024 Notes related to the settlement of the early conversions was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of our convertible notes, when available, our common stock price and interest rates based on similar debt issued by parties with credit ratings similar to ours (Level 2). NOTE 15—INCOME TAXES The following table presents our income before income taxes, inclusive of our share of equity method investments losses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Domestic ​ $ 418,216 ​ $ 821,001 ​ $ 378,267 Foreign ​ 19,068 ​ 1,103 ​ ( 1,854 ) Total ​ $ 437,284 ​ $ 822,104 ​ $ 376,413 ​ ​ ​ ​ 106 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The following table presents a summary of our income tax expense (benefit): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Current ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal ​ $ ( 6,773 ) ​ $ 111,975 ​ $ 85,708 State ​ 1,013 ​ 28,141 ​ 23,684 Foreign ​ 7,012 ​ 363 ​ 126 Total current tax expense ​ 1,252 ​ 140,479 ​ 109,518 Deferred ​ ​ ​ Federal ​ ( 78,032 ) ​ ( 3,841 ) ​ ( 2,251 ) State ​ ( 18,639 ) ​ ( 2,885 ) ​ ( 2,536 ) Foreign ​ 4,061 ​ ( 195 ) ​ ( 133 ) Total deferred tax benefit ​ ( 92,610 ) ​ ( 6,921 ) ​ ( 4,920 ) Total income tax expense (benefit) ​ $ ( 91,358 ) ​ $ 133,558 ​ $ 104,598 ​ A reconciliation of the federal statutory tax rate to our effective tax rate was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ ​ 2023 2022 2021 ​ Provision at federal statutory tax rate 21.0 % 21.0 % 21.0 % State income taxes—net of federal tax impact ( 2.8 ) 2.4 4.2 ​ Stock compensation—excess benefits ( 50.0 ) ( 8.0 ) ( 4.9 ) ​ Tax impact of convertible senior notes repurchase ​ 9.4 ​ — ​ — ​ Non-deductible stock-based compensation 0.9 0.6 6.5 ​ Valuation allowance 0.5 — 0.1 ​ Tax rate adjustments and other 0.1 0.2 0.3 ​ Other permanent items — — 0.6 ​ Effective tax rate ( 20.9 ) % 16.2 % 27.8 % ​ We have recorded deferred tax assets and liabilities based upon estimates of their realizable value, such estimates are based upon likely future tax consequences. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 107 ​ Table of Contents Significant components of our deferred tax assets and liabilities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, JANUARY 29, ​ 2023 2022 ​ ​ (in thousands) Non-current deferred tax assets (liabilities) ​ ​ Lease liabilities ​ $ 339,911 ​ $ 317,971 Net operating loss carryforwards ​ 120,586 ​ 2,884 Accrued expenses ​ 30,108 ​ 19,572 Interest expense carryforwards ​ ​ 28,584 ​ ​ — Stock-based compensation ​ ​ 14,974 ​ ​ 26,205 Merchandise inventories ​ 13,346 ​ 10,318 Deferred revenue ​ 3,242 ​ 1,739 Deferred lease credits ​ — ​ 4,854 Convertible senior notes ​ — ​ 779 Other ​ 4,483 ​ 1,152 Non-current deferred tax assets ​ 555,234 ​ 385,474 Valuation allowance ​ ( 4,202 ) ​ ( 1,959 ) Non-current deferred tax assets—net ​ $ 551,032 ​ $ 383,515 Property and equipment ​ $ ( 212,424 ) ​ $ ( 154,821 ) Lease right-of-use assets ​ ( 142,199 ) ​ ( 146,368 ) Prepaid expense and other ​ ( 15,894 ) ​ ( 11,077 ) Tradename, trademarks and intangibles ​ ( 11,452 ) ​ ( 12,603 ) State benefit ​ ( 8,339 ) ​ ( 1,803 ) Non-current deferred tax liabilities ​ ( 390,308 ) ​ ( 326,672 ) Total non-current deferred tax assets—net ​ $ 160,724 ​ $ 56,843 ​ A reconciliation of our valuation allowance against deferred tax assets in certain state and foreign jurisdictions due to historical losses was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Balance at beginning of fiscal year ​ $ 1,959 ​ $ 2,049 ​ $ 1,007 Net changes in deferred tax assets and liabilities ​ 2,243 ​ ( 90 ) ​ 1,042 Balance at end of fiscal year ​ $ 4,202 ​ $ 1,959 ​ $ 2,049 ​ As of January 28, 2023, we had federal, state and foreign net operating loss carryovers of $ 478 million, $ 217 million and $ 16 million, respectively. The federal net operating losses do not expire. The state and foreign net operating losses will begin to expire in 2023. Internal Revenue Code Section 382 and similar state rules place a limitation on the amount of taxable income which can be offset by net operating loss carryforwards after a change in ownership (generally greater than 50 % change in ownership). We cannot give any assurances that it will not undergo an ownership change in the future resulting in further limitations on utilization of net operating losses. ​ ​ ​ 108 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents A reconciliation of the exposures related to unrecognized tax benefits was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Balance at beginning of fiscal year ​ $ 8,604 ​ $ 8,456 ​ $ 8,514 Gross decreases—prior period tax positions ​ — ​ ( 143 ) ​ ( 129 ) Gross increases—current period tax positions ​ — ​ 933 ​ 690 Reductions based on the lapse of the applicable statutes of limitations ​ ( 453 ) ​ ( 642 ) ​ ( 619 ) Balance at end of fiscal year ​ $ 8,151 ​ $ 8,604 ​ $ 8,456 ​ As of January 28, 2023, $ 7.6 million of our unrecognized tax benefits would reduce income tax expense and the effective tax rate, if recognized. The remaining unrecognized tax benefits would offset other deferred tax assets, if recognized. In October 2017, we filed an amended federal tax return claiming a $ 5.4 million refund, however, no income tax benefit has been recorded in any fiscal year given the technical nature and amount of the refund claim. An income tax benefit related to this refund claim could be recorded in a future period upon settlement with the respective taxing authority. As of January 28, 2023, we have $ 5.5 million of exposures related to unrecognized tax benefits that are expected to decrease in the next 12 months . We are subject to taxation in the United States and various states and foreign jurisdictions. As of January 28, 2023, we are subject to examination by the tax authorities for fiscal 2018 through fiscal 2022. With few exceptions, as of January 28, 2023, we are no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years prior to fiscal 2018. ​ We have not provided U.S. income or foreign withholding taxes on the undistributed earnings of our foreign subsidiaries as of January 28, 2023 because we intend to permanently reinvest such earnings outside of the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability is expected to be immaterial, due to the participation exemption put in place in the Tax Cuts and Jobs Act of 2017. Inflation Reduction Act On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives, among other provisions. We are evaluating the provisions included under the IRA and do not expect the provisions to have a material impact to our consolidated financial statements. ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 109 ​ Table of Contents NOTE 16—NET INCOME PER SHARE The weighted-average shares used for net income per share were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 Weighted-average shares—basic ​ ​ 23,523,065 ​ ​ 21,270,448 ​ ​ 19,668,976 Effect of dilutive stock-based awards ​ 2,675,660 ​ ​ 6,506,399 ​ ​ 5,470,980 Effect of dilutive convertible senior notes (1) ​ 363,263 ​ ​ 3,336,548 ​ ​ 2,162,312 Weighted-average shares—diluted ​ 26,561,988 ​ 31,113,395 ​ 27,302,268 (1) We adopted ASU 2020-06 in the first quarter of fiscal 2022, and the adoption requires the dilutive impact of the convertible senior notes for diluted net income per share purposes to be determined under the if-converted method which assumes share settlement of the entire convertible debt instrument. Prior to adoption of ASU 2020-06, we applied the treasury stock method to determine the dilutive impact of the 2023 Notes and 2024 Notes for diluted net income per share purposes, and the 2020 Notes, 2023 Notes and the 2024 Notes impact our dilutive share count beginning at stock prices of $ 118.13 per share, $ 193.65 per share and $ 211.40 per share, respectively. The warrants associated with our 2020 Notes, 2023 Notes and 2024 Notes had an impact on our dilutive share count beginning at stock prices of $ 189.00 per share, $ 309.84 per share and $ 338.24 per share, respectively. The warrants associated with our 2020 Notes expired in January 2021. The warrants associated with the 2023 Notes and 2024 Notes were repurchased in April 2022 and, as a result, no warrant instruments are outstanding as of January 28, 2023. Accordingly, the warrants have no impact on our dilutive shares post-repurchase. Refer to Note 12— Convertible Senior Notes . The following number of options and restricted stock units, as well as shares issuable under convertible senior notes prior to extinguishment in fiscal 2022, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 Options ​ 1,096,269 ​ 102,374 ​ 389,830 Restricted stock units 19,154 1,379 316 Convertible senior notes ​ 231,618 ​ — ​ — ​ ​ ​ NOTE 17—SHARE REPURCHASE PROGRAM AND SHARE RETIREMENT Share Repurchase Program In 2018, our Board of Directors authorized a share repurchase program. On June 2, 2022, the Board of Directors authorized an additional $ 2.0 billion for the purchase of shares of our outstanding common stock, increasing the total authorized size of the share repurchase program to $ 2,450 million (the “Share Repurchase Program”). We did no t make any repurchases under this program during either fiscal 2021 or fiscal 2020. In fiscal 2022, we repurchased 3,719,550 shares of our common stock under the Share Repurchase Program at an average price of $ 268.83 per share, for an aggregate repurchase amount of approximately $ 1.0 billion. As of January 28, 2023, $ 1,450 million remains available for future share repurchases under this program. Share Retirements In fiscal 2022, we retired 3,719,550 shares of common stock related to shares we repurchased under the Share Repurchase Program. As a result of this retirement, we reclassified a total of $ 444 million and $ 560 million from treasury stock to additional paid-in capital and retained earnings , respectively, on the consolidated balance sheets and consolidated statements of stockholders’ equity. There was no impact on the consolidated statements of income or cash flows related to the share retirement activity. ​ ​ ​ 110 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents NOTE 18—STOCK-BASED COMPENSATION We recorded stock-based compensation expense of $ 44 million, $ 48 million and $ 146 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively, which is included in selling, general and administrative expenses on the consolidated statements of income. No stock-based compensation expense has been capitalized in the accompanying consolidated financial statements. 2012 Stock Incentive Plan and 2012 Stock Option Plan The Restoration Hardware 2012 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted on November 1, 2012. The Stock Incentive Plan provides for the grant of incentive stock options to our employees, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to our employees, directors and consultants and our parent and subsidiary corporations’ employees, directors and consultants. The Restoration Hardware 2012 Stock Option Plan (the “Option Plan”) was adopted on November 1, 2012 and on such date 6,829,041 fully vested options were granted under this plan to certain of our employees and advisors. Aside from these options granted on November 1, 2012, no other awards were granted under the Option Plan. As of January 29, 2022, there were a total of 1,185,322 shares issuable under the Stock Incentive Plan. On January 31, 2022, an additional 430,139 shares became issuable under the Stock Incentive Plan in accordance with the Stock Incentive Plan evergreen provision, increasing the total number of shares issuable under the Stock Incentive Plan to 1,615,461 . Awards under the plans reduced the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Stock Incentive Plan increased the number of shares available for future issuance. Cancellations and forfeitures of awards previously granted under the Option Plan were immediately retired and were no longer available for future issuance. On November 1, 2022, both the Stock Incentive Plan and Option Plan expired. Upon expiration of the Stock Incentive Plan, a total of 1,607,508 shares that were available for future issuance under the plan were cancelled and were no longer available for the grant of awards under the plan. 2012 Stock Incentive Plan and 2012 Stock Option Plan—Stock Options A summary of stock option activity under the Stock Incentive Plan and the Option Plan was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ WEIGHTED-AVERAGE ​ ​ OPTIONS ​ EXERCISE PRICE Outstanding—January 29, 2022 7,700,107 ​ $ 111.76 Granted 85,500 ​ ​ 263.56 Exercised ( 4,249,285 ) ​ ​ 54.44 Cancelled ( 120,370 ) ​ ​ 305.40 Outstanding—January 28, 2023 3,415,952 ​ $ 180.03 ​ The fair value of stock options granted was estimated on the date of grant using the following assumptions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ ​ 2023 ​ 2022 ​ 2021 Expected volatility 62.4 % 64.2 % 58.9 % Expected life (years) 7.3 7.3 8.3 ​ Risk-free interest rate 3.8 % 1.4 % 0.6 % Dividend yield — — — ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 111 ​ Table of Contents ​ A summary of additional information about stock options was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ ​ 2023 ​ 2022 ​ 2021 ​ ​ (in thousands, except per share amounts) Weighted-average fair value per share of stock options granted ​ $ 171.78 ​ $ 392.65 ​ $ 168.90 Aggregate intrinsic value of stock options exercised ​ 1,102,657 ​ 280,060 ​ 75,011 Fair value of stock options vested ​ 18,071 ​ 22,665 (1) ​ 12,429 (1) The fair value of stock options vested in fiscal 2021 was disclosed as $ 59,074 in our fiscal 2021 Form 10-K and has been updated with the amount presented herein. Information about stock options outstanding, vested or expected to vest, and exercisable as of January 28, 2023 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ OPTIONS OUTSTANDING ​ OPTIONS EXERCISABLE ​ ​ WEIGHTED- ​ ​ ​ ​ ​ ​ ​ ​ ​ AVERAGE ​ WEIGHTED- ​ ​ ​ WEIGHTED- ​ ​ ​ ​ REMAINING ​ AVERAGE ​ ​ ​ AVERAGE ​ ​ NUMBER OF ​ CONTRACTUAL ​ EXERCISE ​ NUMBER OF ​ EXERCISE RANGE OF EXERCISE PRICES ​ OPTIONS ​ LIFE (IN YEARS) ​ PRICE ​ OPTIONS ​ PRICE $ 25.39 — $ 45.82 269,642 ​ 3.32 ​ $ 35.67 ​ 269,642 ​ $ 35.67 $ 50.00 — $ 50.00 1,000,000 ​ 4.26 ​ ​ 50.00 ​ 1,000,000 ​ ​ 50.00 $ 53.47 — $ 109.87 ​ 516,826 ​ 4.10 ​ ​ 87.31 ​ 320,296 ​ ​ 77.35 $ 111.37 — $ 164.12 478,479 ​ 7.15 ​ ​ 154.17 ​ 92,639 ​ ​ 153.70 $ 174.32 — $ 380.53 ​ 330,780 ​ 7.91 ​ ​ 285.34 ​ 61,060 ​ ​ 280.85 $ 385.30 — $ 385.30 ​ 700,000 ​ 7.72 ​ ​ 385.30 ​ 700,000 ​ ​ 385.30 $ 389.34 — $ 713.52 ​ 120,225 ​ 8.33 ​ ​ 601.85 ​ 14,130 ​ ​ 591.29 Total 3,415,952 ​ ​ $ 180.03 2,457,767 ​ $ 160.25 Vested or expected to vest 3,218,626 ​ ​ $ 175.84 ​ ​ The aggregate intrinsic value of options outstanding, options vested or expected to vest, and options exercisable as of January 28, 2023 was $ 537 million, $ 516 million and $ 427 million, respectively. Stock options exercisable as of January 28, 2023 had a weighted-average remaining contractual life of 5.15 years. We recorded stock-based compensation expense related to stock options of $ 41 million, $ 45 million and $ 140 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. The expense includes $ 18 million, $ 24 million and $ 117 million, respectively, associated with the option grant to Mr. Friedman in October 2020 (refer to Chairman and Chief Executive Officer Option Grant below). As of January 28, 2023, the total unrecognized compensation expense related to unvested options was $ 83 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 4.13 years. In addition, as of January 28, 2023, the total unrecognized compensation expense related to the fully vested option grant made to Mr. Friedman in October 2020 was $ 15 million, which will be recognized on an accelerated basis through May 2025 (refer to Chairman and Chief Executive Officer Option Grant below). Chairman and Chief Executive Officer Option Grant On October 18, 2020, our Board of Directors granted Mr. Friedman an option to purchase 700,000 shares of our common stock with an exercise price equal to $ 385.30 per share under the 2012 Stock Incentive Plan. ​ ​ ​ 112 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The option contains selling restrictions on the underlying shares that lapse upon the achievement of both time-based service requirements and stock price performance-based metrics. The option was fully vested on the date of grant but the shares underlying the option remain subject to transfer restrictions to the extent the performance-based and time-based requirements have not been met. The option will result in aggregate non-cash stock compensation expense of $ 174 million, of which $ 18 million, $ 24 million and $ 117 million was recognized in fiscal 2022, fiscal 2021 and fiscal 2020, respectively (which is included in the stock-based compensation expense amounts noted above). 2012 Stock Incentive Plan—Restricted Stock Awards We grant restricted stock awards, which include restricted stock and restricted stock units, to our employees and members of our Board of Directors. A summary of restricted stock award activity is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ WEIGHTED- ​ ​ ​ ​ ​ ​ AVERAGE ​ ​ ​ ​ ​ ​ ​ GRANT DATE FAIR ​ INTRINSIC ​ ​ AWARDS ​ VALUE ​ VALUE Outstanding—January 29, 2022 19,750 ​ $ 399.89 ​ Granted 14,577 ​ ​ 318.86 ​ Released ( 11,747 ) ​ ​ 229.36 ​ Cancelled ( 1,660 ) ​ ​ 340.24 ​ Outstanding—January 28, 2023 20,920 ​ $ 443.92 ​ $ 6,498,798 ​ A summary of additional information about restricted stock awards is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ JANUARY 28, JANUARY 29, JANUARY 30, ​ ​ 2023 ​ 2022 ​ 2021 Weighted-average fair value per share of awards granted ​ $ 318.86 ​ $ 582.79 ​ $ 371.36 Grant date fair value of awards released (in thousands) ​ 2,694 ​ 4,257 ​ 6,710 ​ We recorded stock-based compensation expense related to restricted stock awards of $ 3.0 million, $ 3.0 million and $ 4.9 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. As of January 28, 2023, the total unrecognized compensation expense related to unvested restricted stock awards was $ 7.2 million, which is expected to be recognized on a straight-line basis over a weighted-average period of 3.97 years. Compensation Related to Consolidated VIEs Refer to Note 8— Variable Interest Entities for details of non-cash compensation related to consolidated variable interest entities. NOTE 19—EMPLOYEE BENEFIT PLANS We have a 401(k) plan for our employees who meet certain service and age requirements. Participants may contribute up to 50 % of their salaries limited to the maximum allowed by the Internal Revenue Service regulations. We, at our discretion, may contribute funds to the 401(k) plan. We made no contributions to the 401(k) plan during fiscal 2022, fiscal 2021 or fiscal 2020. NOTE 20—COMMITMENTS AND CONTINGENCIES Commitments We had no material off balance sheet commitments as of January 28, 2023. ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 113 ​ Table of Contents Contingencies We are subject to contingencies, including in connection with lawsuits, claims, investigations and other legal proceedings incident to the ordinary course of our business. These disputes are increasing in number as we expand our business and provide new product and service offerings, such as restaurants and hospitality, and as we enter new markets and legal jurisdictions and face increased complexity related to compliance and regulatory requirements. In addition, we are subject to governmental and regulatory examinations, information requests, and investigations from time to time at the state and federal levels. Certain legal proceedings that we currently face involve various class-action allegations regarding employment practices, including under state wage-and-hour laws. We have faced similar litigation in the past. Due to the inherent difficulty of predicting the course of legal actions related to these class-action allegations, such as the eventual scope, duration or outcome, we may be unable to estimate the amount or range of any potential loss that could result from an unfavorable outcome arising from such matters. Our assessment of these legal proceedings, as well as other lawsuits, could change from future determinations or the discovery of facts that are not presently known. We continue to defend such cases and our estimates may evolve over time. Accordingly, the ultimate costs to resolve these cases may be substantially higher or lower than our estimates. With respect to such contingencies, we review the need for any loss contingency reserves and establish reserves when, in the opinion of our senior leadership team, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. Loss contingencies determined to be probable and estimable are recorded in accounts payable and accrued expenses on the consolidated balance sheets (refer to Note 9 — Accounts Payable, Accrued Expenses and Other Current Liabilities ). These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to each matter. In view of the inherent difficulty of predicting the outcome of certain matters, particularly in cases in which claimants seek substantial or indeterminate damages, it may not be possible to determine whether a liability has been incurred or to reasonably estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no reserve is established until that time. When and to the extent that we do establish a reserve, there can be no assurance that any such recorded liability for estimated losses will be for the appropriate amount, and actual losses could be higher or lower than what we accrue from time to time. Although we believe that the ultimate resolution of our current legal proceedings will not have a material adverse effect on the consolidated financial statements, the outcome of legal matters is subject to inherent uncertainty. Although we are self-insured or maintain deductibles in the United States for workers’ compensation, general liability and product liability up to predetermined amounts, above which third party insurance applies, depending on the facts and circumstances of the underlying claims, coverage under our insurance policies may not be available. Even if we believe coverage does apply under our insurance programs, our insurance carriers may dispute coverage based on the underlying facts and circumstances. As a result, the outcome of any matters in which we are involved could result in unexpected expenses and liability that could adversely affect our operations. In addition, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of our senior leadership team’s time, result in the diversion of significant operational resources, and require changes to our business operations, policies and practices. Legal costs related to such claims are expensed as incurred. NOTE 21—SEGMENT REPORTING We define reportable and operating segments on the same basis that we use to evaluate our performance internally by the chief operating decision maker (“CODM”), which we have determined is our Chief Executive Officer. We have three operating segments: RH Segment, Waterworks and Real Estate. The RH Segment and Waterworks operating segments (the “retail operating segments”) include all sales channels accessed by our customers, including sales through retail locations and outlets, including hospitality, websites, Source Books, and the Trade and Contract channels. The Real Estate segment represents operations associated with our equity method investments and certain of our consolidated variable interest entities that are non-wholly owned subsidiaries and have operations that are not directly related to RH’s operations (refer to Note 8— Variable Interest Entities ). ​ ​ ​ 114 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The retail operating segments are strategic business units that offer products for the home furnishings customer. While RH Segment and Waterworks have a shared senior leadership team and customer base, we have determined that their results cannot be aggregated as they do not share similar economic characteristics, as well as due to other quantitative factors. Segment Information We use operating income to evaluate segment profitability for the retail operating segments and to allocate resources. Operating income is defined as net income before interest expense—net, loss on extinguishment of debt, other expense—net, income tax expense (benefit) and our share of equity method investments losses. Segment operating income excludes (i) asset impairments, (ii) the amortization of the non-cash compensation charge related to the fully vested option grant made to Mr. Friedman in October 2020, (iii) employer payroll tax expense related to the option exercises by Mr. Friedman, (iv) professional fees related to the 2023 Notes and 2024 Notes transactions (refer to Note 12— Convertible Senior Notes ), (v) non-cash compensation attributed to the noncontrolling interests holder of our consolidated variable interest entities (refer to Note 8— Variable Interest Entities ), (vi) compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary, (vii) product recalls, (viii) favorable legal settlement, (ix) gain on sale of building and land, (x) loss on sale leaseback transaction and (xi) severance costs associated with reorganizations. These items are excluded from segment operating income in order to provide better transparency of segment operating results. Accordingly, these items are not presented by segment because they are excluded from the segment profitability measure that the CODM and our senior leadership team reviews. The following table presents segment operating income and income before income taxes and equity method investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Operating income: ​ ​ ​ ​ ​ ​ ​ ​ ​ RH Segment ​ $ 761,544 ​ $ 944,881 ​ $ 616,523 Waterworks ​ 28,282 ​ 17,747 ​ 4,019 Asset impairments ​ ( 24,186 ) ​ ( 9,630 ) ​ ( 12,851 ) Non-cash compensation ​ ​ ( 18,072 ) ​ ​ ( 23,428 ) ​ ​ ( 117,084 ) Employer payroll taxes on option exercises ​ ​ ( 14,392 ) ​ ​ — ​ ​ — Professional fees ​ ( 7,469 ) ​ — ​ — Non-cash compensation related to consolidated VIEs ​ ​ ( 4,470 ) ​ — ​ — Compensation settlements ​ ( 3,483 ) ​ — ​ — Recall accrual ​ ( 560 ) ​ ( 1,940 ) ​ ( 7,370 ) Legal settlement ​ ​ 4,188 ​ ​ — ​ ​ — Gain on sale of building and land ​ ​ 775 ​ ​ — ​ ​ — Loss on sale leaseback transaction ​ ​ — ​ ​ — ​ ​ ( 9,352 ) Reorganization related costs ​ ​ — ​ ​ ( 449 ) ​ ​ ( 7,027 ) Income from operations ​ 722,157 ​ 927,181 ​ 466,858 Interest expense—net ​ 113,210 ​ 64,947 ​ 69,250 (Gain) loss on extinguishment of debt ​ 169,578 ​ 29,138 ​ ( 152 ) Other expense—net ​ ​ 30 ​ ​ 2,778 ​ ​ 20,459 Income before income taxes and equity method investments ​ $ 439,339 ​ $ 830,318 ​ $ 377,301 ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 115 ​ Table of Contents ​ The following table presents the statements of income metrics reviewed by the CODM to evaluate performance internally or as required under ASC 280— Segment Reporting : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ ​ 2023 ​ 2022 ​ 2021 ​ ​ RH SEGMENT ​ WATERWORKS ​ TOTAL RH SEGMENT ​ WATERWORKS ​ TOTAL RH SEGMENT ​ WATERWORKS ​ TOTAL ​ ​ (in thousands) Net revenues ​ $ 3,398,638 $ 191,839 $ 3,590,477 ​ $ 3,593,842 $ 164,978 $ 3,758,820 ​ $ 2,729,422 $ 119,204 $ 2,848,626 Gross profit ​ 1,708,444 103,541 1,811,985 ​ 1,772,668 82,743 1,855,411 ​ 1,274,148 51,383 1,325,531 Depreciation and amortization ​ 103,221 5,367 108,588 ​ 91,252 4,770 96,022 ​ 95,071 4,969 100,040 ​ In fiscal 2022, fiscal 2021 and fiscal 2020, the Real Estate segment share of equity method investments losses were $ 2.1 million, $ 8.2 million and $ 0.9 million, respectively. Our share of income from equity method investments for the Waterworks segment was immaterial. The following table presents the balance sheet metrics as required under ASC 280— Segment Reporting : ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, ​ JANUARY 29, ​ ​ 2023 ​ 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ RH SEGMENT WATERWORKS REAL ESTATE TOTAL RH SEGMENT WATERWORKS REAL ESTATE TOTAL ​ ​ (in thousands) Goodwill (1) ​ $ 141,048 ​ $ — ​ $ — ​ $ 141,048 ​ $ 141,100 ​ $ — ​ $ — ​ $ 141,100 Tradenames, trademarks and other intangible assets (2) ​ 57,633 ​ 17,000 ​ — ​ 74,633 ​ 56,161 ​ 17,000 ​ — ​ 73,161 Equity method investments ​ ​ — ​ ​ 623 ​ ​ 100,845 ​ ​ 101,468 ​ ​ — ​ ​ — ​ ​ 100,810 ​ ​ 100,810 Total assets ​ 4,953,610 ​ 217,228 ​ 138,451 ​ 5,309,289 ​ 5,259,719 ​ 179,941 ​ 100,810 ​ 5,540,470 (1) The Waterworks reporting unit goodwill of $ 51 million recognized upon acquisition in fiscal 2016 was fully impaired as of fiscal 2018. (2) The Waterworks reporting unit tradename is presented net of an impairment charge of $ 35 million. ​ We classify our sales into furniture and non-furniture product lines. Furniture includes both indoor and outdoor furniture. Non-furniture includes lighting, textiles, fittings, fixtures, surfaces, accessories and home décor, as well as our hospitality operations. Net revenues in each category were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ YEAR ENDED ​ ​ JANUARY 28, ​ JANUARY 29, ​ JANUARY 30, ​ 2023 2022 2021 ​ ​ (in thousands) Furniture ​ $ 2,492,514 ​ $ 2,599,540 ​ $ 1,940,658 Non-furniture ​ 1,097,963 ​ 1,159,280 ​ 907,968 Total net revenues ​ $ 3,590,477 ​ $ 3,758,820 ​ $ 2,848,626 ​ We are domiciled in the United States and primarily operate our retail locations and outlets in the United States. As of January 28, 2023 we operated 4 retail locations and 2 outlets in Canada, and 1 retail location in the U.K. Geographic revenues in Canada and the U.K. are based upon revenues recognized at the retail locations in the respective country and were not material in any fiscal period presented. No single customer accounted for more than 10 % of our revenues in fiscal 2022, fiscal 2021 or fiscal 2020. ​ ​ ​ ​ 116 | FORM 10-K PART II — FINANCIAL STATEMENTS ​ Table of Contents The following table presents our long-lived assets by geographic information: ​ ​ ​ ​ ​ ​ ​ ​ ​ JANUARY 28, ​ ​ ​ 2023 ​ ​ ​ (in thousands) North America ​ ​ $ 2,261,615 All other countries ​ ​ 184,414 Total long-lived assets ​ ​ $ 2,446,029 ​ Long-lived assets held internationally were not material as of January 29, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ PART II — FINANCIAL STATEMENTS FORM 10-K | 117 ​ Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.